The Epicurean Dealmaker

Mr. Indispensable

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 17 May 2013 01:42:00 +0000

“The cemeteries are full of indispensable men.”

— Attributed to several indispensable men

Fire Jamie Dimon.

There, that got your attention, didn’t it?

Seriously, folks, the brouhaha surrounding the upcoming nonbinding shareholder vote to separate the Chairman and Chief Executive Officer roles at J.P. Morgan is getting a bit silly. People are marshaling all sorts of weak, irrelevant, and disingenuous reasons on both sides to argue for and against the resolution. Hence we get ludicrous examples of access journalists asking a gaggle of powerful white men whether another powerful white man should lose his power. Gee, I wonder how that turned out, don’t you?

I will not bore you with a demolition of the flyweight reasons the pros are using, including envy, spite, ad hominem vitriol, and gleeful detestation of Mr. Dimon as an avatar of hated “banksters” everywhere. On the other side, however, the cons have assembled all sorts of arguments against stripping Mr. Dimon of his Chairmanship which woefully fail to address the central point of the exercise, which is good corporate governance. Some say Jamie shepherded the House of Morgan through the dark days of the financial crisis with nary a scratch, and hence should be rewarded by keeping his seat at the head of the boardroom table. Yes he did, and a boffo job at that. So what? I got really good scores on my SATs. Did that mean I didn’t have to take tests or submit papers in college? Of course not: the past is the past. Besides, J.P. Morgan sailed into the Panic of 2008 in the best shape of any of its peers, with the possible exception of much smaller Goldman Sachs, which also came out smelling like a (relative) rose. It’s not like Jamie excavated a pile of shit and turned it into gold. He started with a pile of gold and mostly kept the tarnish off. No superhero he.

Some say the evidence of outperformance by companies with bifurcated Chairman/CEO roles is lacking. Part of that is due to the all-too notable reluctance of powerful men to give up power (viz. supra), which has led to a remarkable paucity of such structures among large publicly-traded corporations. Hence, the sample set from which one can draw financial performance data is unhelpfully small. Even so, this is a remarkably lame argument, equivalent to the contention that the fact that most people who wear seatbelts never get into accidents (and, contrariwise, wearing a seatbelt does not prevent accidents) means that seatbelts are useless. Go ahead and pull the other one.

Still other FOJs contend Mr. Dimon’s delivery of $21 billion in record profits last year should silence his critics and put the kibosh on this petty attempt to strip him of rightful powers and duties. But I say the man or woman at the helm of a $2.4 trillion colossus which employs over a quarter of a million people around the globe damn well better produce some pretty amazing results, especially when so many of its largest competitors remain in disarray, the cost of funds for financial firms could not be cheaper if Ben Bernanke were backing up a dump truck full of dead presidents into J.P. Morgan’s lobby, and his privately held bank is implicitly backed by the full faith and credit of the United States government (and perhaps the European Union, too).¹ The man is a CEO. He is supposed to create good results with the awe inspiring assets he has at his disposal. He did. Big whoop. Give the man a fucking fruitcake.²

* * *

But all this is smoke and mirrors.

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically. The CEO is supposed to be the chief employee, leading his or her organization to deliver on the agenda and objectives the Board of Directors has set. The CEO is an operating executive.

The Chairman, on the other hand, is supposed to lead the Board of Directors in setting the agenda, strategy, and objectives of the corporation, in response to its employers, the shareholders, and all the other myriad stakeholders (employees, regulators, government officials, vendors, community members, and customers) which have a say or a stake in the activity of the firm. The Chairman and other directors of the corporation are stewards. They are not supposed to get down in the weeds, day to day, operating the various parts of the business. That is the CEO’s job. But as stewards they are supposed to think about the what-ifs, the perils and opportunities that may or may not confront the firm in the future, and the problems and threats which may be festering beneath the glittering surface of excellent corporate performance. A properly engaged CEO doesn’t have time to worry about such matters. He has a day job to perform.

The other key duty of the Board, with the Chairman at its head, is oversight. The Board is supposed to monitor the performance of the CEO and his or her key executives: guide, correct, discipline, and incentivize him or her to perform in a way which achieves the objectives they have set and satisfies the other constraints the firm must operate under. Even the meanest intelligence can see that having the Chairman and CEO of a firm be the same person collapses this crucial function into irrelevance:

“Gee, Jamie, do you think you’re performing adequately in the public relations part of your job?”
“Why, yes, Jamie, I think I’m doing a great job, don’t you?”
“Sure I do! Have a cigar.”

Of course, a soi-disant superman CEO could surely set his own agenda and monitor his own performance—just as his lesser peers can certainly contribute their valuable perspectives on such matters to their Boards—but such arrangements diminish the patently obvious benefit of involving more than one person’s perspective in the issue. Not to mention short-circuiting the potential for meaningful criticism and disagreement over firm challenges, issues, and threats which merit serious discussion. I don’t care how big your head is, two heads (or more) are always better than one.

The role of the Board as stewards of the firm and monitors of the CEO and his or her executive team naturally introduces a healthy tension into the governance of a large organization. A Board which is properly performing these duties will have occasion to challenge, correct, punish, reward, and occasionally fire a CEO. Find me a person who could legitimately do this to him or herself and I will show you a person who is temperamentally unsuited to the role of CEO. They just don’t make psychopaths that way.

* * *

So much for principle and common sense.

The real reason to strip Jamie Dimon of his Chairmanship is that he has done a shitty job at it. He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm’s current senior executives—especially the CEO—its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.

The fact that certain people find Jamie’s petulant whining that he may quit if shareholders vote to strip him of the Chairman role a credible threat is proof positive that the current Chairman of J.P. Morgan has done a lousy job preparing for the inevitable eventuality that Dimon will have to be replaced. The current Chairman has also done a lousy job cajoling the current CEO to delegate more of the minutiae of running a place as gigantic and complex as J.P. Morgan to trusted lieutenants, and to train and mentor those lieutenants into a position where they can ultimately replace him. That these are related issues, and practices which strike at the very heart of the purported indispensability of any Chief Executive Officer, is highly revealing.

Finally, the current Chairman has done a lousy job selecting his other Board members, particularly in the all-important area of audit and risk management. The risk oversight and monitoring function at a gigantic, staggeringly complex lending and trading bank like J.P. Morgan is arguably the most important one—after CEO succession—a Board has. Yet Jamie stacked his risk committee with a former lawyer and professional board member previously on the risk committee at AIG who currently heads a natural history museum, a rich kid whose life experience consists of managing grandad’s money, and the CEO of a a flight controls company. I will wander way out on a limb here and bet these people couldn’t evaluate the financial risks of a childrens’ lemonade stand, much less one of the largest banks on the planet.

The current Chairman of J.P. Morgan has done a crappy job in almost every dimension that can be measured. And don’t point me to his lead director Tweety Bird, either. I don’t care how fearsome Lee Raymond’s reputation as a former imperial Chairman and CEO was, it is clear he can’t get Jamie Dimon to return his phone calls, much less address the critical areas of underperformance I have identified.

The agenda is clear: the current Chairman of J.P. Morgan should be run out of town on a rail. The current CEO can stay, assuming a new, effective, powerful Chairman thinks he’s up to snuff. Clearly somebody needs to smack that knucklehead around a little.

Fortunately, Jamie, you will be relieved to hear I am not available.

Related reading:
To Catch a Thief (February 13, 2009)
J.P. Morgan and the Marlboro Man (May 20, 2012)

¹ Want to deny this? Envision, if you can, whether the US government would let anything happen to all of $2.4 trillion, 256,000 people strong J.P. Morgan if it got into serious trouble. Do you for a minute think they would let it crater like Lehman Brothers? That they would even consider it? I didn’t think so.
² Or, say, $20 million.

© 2013 The Epicurean Dealmaker. All rights reserved.

Go Ahead, Live a Little

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 13 May 2013 02:45:00 +0000

Longtime followers of this cut-rate opinion emporium will recall your Humble Bloggist to be a gushing fan of Financial Times management inquisitor Lucy Kellaway, whose rapier wit, ear for human folly, and impeccable judgment have always encouraged me to envision her as a modern-day Musketeer wielding a PhD in bullshit detection while sporting sensible shoes.¹ Among her many other contributions to modern society, she presides over an occasional agony aunt column for victims of financial capitalism entitled, appropriately enough, “Dear Lucy.”

As chance would have it, a recent inquiry therein puzzled me enough to encourage me to pop my head up from my hidey hole in the Volcano Lair and offer a judicious comment or two. The hapless correspondent’s plea is brief:

I have worked in Global Markets for an investment bank since I graduated six years ago. I’ve recently been given the opportunity to go travelling with my boyfriend, but I wonder how long I can be away from the industry and still have a good chance of being re-employed on my return. Six months? One year? Three years? I’m also aware that when I get back, I’ll be an attached, childless woman in her early 30s, which shouldn’t affect my employment chances but I’m worried it will.

How can I manage this before we go to leave as many doors open as possible?

Banker, female, 28

* * *

Now, my first reaction on reading this tidbit was “Huh?” The emphasis, phrasing, and even question itself is all wrong. “Bloodless,” Lucy calls it, and bloodless it is. Putting aside the apparent implications for this person’s relationship with her boyfriend, it raises serious questions in my reptilian Managing Director’s brain concerning the status of her employment. Certain clues, like “worked in” and “being re-employed” lead me to believe that, notwithstanding this supplicant’s self-selected sobriquet, she is nothing remotely like a real, front office, revenue-generating “banker” and is instead a faceless, gormless member of the administrative, sales, or information technology support staff at her so-called investment bank. A real global markets banker worth the title would have 1) puffed herself up—“built a successful career in Global Markets for a leading investment bank”—and 2) crumpled the letter up and thrown it away before sending it to Lucy, because of course any bank in their right mind would hire a banker of her genius and ability no matter what the fuck she did for three years. People who are successful (and who have a sporting chance of success) in my business just don’t undersell themselves the way this person does.

But, in the interest of charity (and producing a blog post more interesting than this might otherwise be), I will choose to put another spin on the affair. Perhaps her passive-aggressive boyfriend—who has had to listen for years to glowing reports of her fast-paced, exciting life among funny, brilliant, puissant young men who make many multiples of the pittance he brings in as a clerk at the Carphone Warehouse—sent the letter to Lucy in hopes of guilting her into quitting her job and paying for his beach vacation in Phuket for the next three years. Or perhaps this person really is a talented, driven revenue producer who eats nails for breakfast and spits iron filings for lunch but, like many in her industry, is simply incapable of writing her way out of a paper bag with a map and a blowtorch. Or maybe even this person makes £100 million per year trading Cadbury DairyMilk futures for her desperately grateful third-rate Spanish commercial bank but has been cowed by all the ex-Carphone Warehouse employees waving “Occupy Whoever Has Money” signs in Trafalgar Square into epic self-deprecation.

You get the idea. Let’s assume the improbable and take this person’s letter as sincere.

* * *

In which case, my next question is also “Huh?” For a person who has been working in the capital markets division of a major investment or universal bank for six years surely should have developed some horse sense about her industry. People just don’t take sabbaticals in capital markets or investment banking. As Lucy rightly says, things change too fast. Markets change, securities change, customer relationships change. Disappear for one year, much less three, and nobody will remember your name, much less care what you have to say about anything.

I had a Managing Director tell me years ago, when I was a mere pup, wet behind the ears, that the best strategy to succeed in investment banking was to keep your seat. Success would come, and success would go, but you could never enjoy the fruits of good luck or a heated market if you weren’t in a position where you could get paid. Young and naive as I was, I remember finding this advice rather cynical and dispiriting. Surely you kept your seat and made lots of money for your firm because you were really good, because clients respected and trusted you, because you gave them great advice. Because you were better than anybody else. This was stupid on my part. He was right.

Nobody is indispensable in my industry. Nobody. Ever. For every hotshot trader or investment banker glorying in her run of luck and outsized compensation, there are twenty waiting in the wings who could do just as good a job. And a hundred who would be willing to work for half pay to prove they could do so too.

I’ve said it a billion times: in investment banking or sales and trading, you’re only as good as your last deal or your last trade. And your last deal or your last trade had much more to do with you being in the right place at the right time—being in the right seat—than with your charm, skill, or intelligence. And none of us know when the right deal is going to hit.

Everybody figures this out sooner or later. Senior management knows it by heart. So when a banker leaves the industry of their own volition, the message is very clear: “I’m never coming back.”

* * *

Which is not to say you shouldn’t do it. Hey, maybe you’re tired of the grind. Maybe you’ve done your time in Hell, and it’s time to enjoy life a little. Working investment banking hours, under investment banking pressure, with a bankful of aggressive, psychopathic assholes for six years until the age of 28 is enough to make anyone want to chill out on the beach with an umbrella drink for a year or three. It’s your life.

Just don’t have any expectations that your old job, or anything like it, will be waiting for you when you get back. Your experience will be stale and out of date: useless. And there is nothing about your charm or intelligence that will distinguish you from the line of a hundred identical eager valedictorians waiting outside our hiring office. If anything, they’re probably hungrier and more naive (hence more malleable) than you. Intelligence is table stakes. What really makes an investment banker successful is drive and ambition. Will you still have it after traveling the world?

If so, feel free to reapply. But, take it from me, you better have some damn good stories to tell: why you left, what you did while you were away, and why you want to come back. Those are real assets. The rest of us poor slobs who stayed behind want to hear what the real world looks like. But more importantly, we want to believe if we give you one of the scarce seats we have to offer you’re going to have the skill and the drive to make us—and yourself—a boatload of money. That’s the tradeoff: our seat, and the opportunity to make ridiculous amounts of money if you’re lucky, in exchange for your single-minded ambition to do so.

Investment banking is a jealous mistress. She does not suffer indifferent commitment gladly. And she has far too many suitors for her favors to dally with anyone who is not willing to give her one hundred percent.

You do the math.

¹ In contrast, say, to lazy dilettantes too eager to take cheap shots without doing the hard work of actually critiquing all too widespread management idiocies in an enlightening manner.

© 2013 The Epicurean Dealmaker. All rights reserved.

Nothing Gold Can Stay

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 05 May 2013 17:42:00 +0000

Kawase Hasui, Spring Evening at Kintai Bridge, 1947

Nature’s first green is gold,
Her hardest hue to hold.
Her early leaf’s a flower;
But only so an hour.
Then leaf subsides to leaf.
So Eden sank to grief,
So dawn goes down to day.
Nothing gold can stay.

— Robert Frost, “Nothing Gold Can Stay”

We have had one of the longest and most beautiful Springs in New York City this year I can remember. The flowers and blossoming trees seem brighter and longer-lasting than normal, although I have nothing but faulty memory to claim this as fact.

Perhaps I have been more alert to signs of Spring than I am wont after a long and difficult Winter, and more appreciative of the tilting of our planet as balmy breezes and warming sunshine replace bitter freeze. Certainly there has been little enough change in my life for me to believe cold Winter has been banished for good. But hope rises up like tree sap.

The cherry blossoms and gardenias of Central Park fade already. Greedy trees suck up snow melt and sunshine to carpet the grass with shade and canopy over the sky with green. Hot, hard Summer is coming.

Get out now, while you can, and drink the sweet dregs of Spring while they last. There is a special glory to warm sunshine when it is tempered by cool grass and the chilly whispers of Winter’s reluctant departure on the breeze.

Get out now. One day there will come a Winter whose Spring you will never see. Do not waste the Spring you have today.

Nothing gold can stay.

© 2013 The Epicurean Dealmaker. All rights reserved.

In Praise of Jargon

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 29 Apr 2013 03:14:00 +0000

CHAKOBSA: the so-called “magnetic language” derived in part from the ancient Bhotani (Bhotani Jib—Jib meaning dialect). A collection of ancient dialects modified by needs of secrecy, but chiefly the hunting language of the Bhotani, the hired assassins of the first Wars of Assassins.

— Frank Herbert, Dune

Normally, O Dearly Beloved, I am a fan of author and commentator Steven Poole’s witty takedowns of the silly, pretentious behavior humans get up to on occasion. I think I discovered him in medias res, skinning, gutting, and flambéing the “foodie” culture while it yet lived, and the amusing screams of pain and outrage emanating from his victims still echo satisfyingly in this non-foodie’s ears.

But his latest screed on what he calls “management-speak”—the jargon common to corporate businesses and their environs—falls rather more clangingly and less persuasively from his pen. In fact, it comes across rather like Mr. Poole and his pals from the Drones Explorers Club just burst through the forest wall into some Papua New Guinea clearing in 1920 and are pointing and jeering at the bewildered natives in ceremonial costumes:

“My God, Bertie, that chap has painted his entire body with mud! And the Missus isn’t wearing any clothes! Ahahahahaha!!”

It is perhaps fortunate that the corporate world is widely understood to hold a position of social and economic power, else Mr. Poole’s little exercise in cross-cultural satire might get slapped with a libel suit and be investigated for evidence of a hate crime against the underprivileged.

For it is blindingly clear that not only does Mr. Poole beg the question of the purportedly stultifying and spirit-sapping nature of management-speak—stipulating it as true rather than demonstrating it—but also that he has a remarkably ill-informed grasp of the jargon he criticizes, a desperately poor understanding of the way such language is used, and a surprisingly tin ear to boot. If I were a less charitable man, I might suggest that Mr. Poole is a culturally blinkered scrivener who has never set foot inside an actual business meeting or participated in business communication beyond giggling at press releases¹ and watching satiric corporate soap operas on the BBC. If I really wanted to score points, I might accuse him of flogging sloppy, tendentious nonsense designed to provoke the anti-business and anti-elitist prejudices of a certain class of fellow Brits so they will go out and buy his new book. But I wouldn’t want to be accused of being culturally insensitive to the species Homo authoriensis, so I won’t even mention it.

* * *

So, in the spirit of cross-cultural understanding, let me reach my hand across the gaping divide between those who work for a living and those who cannot understand why they have to to proffer a little gentle education. Mr. Poole’s list of the ten worst offenders among management-speak will stand as a serviceable roadmap for my purposes.

1. Going forward
Yes, this phrase does indeed stand in for “from now on” or “in future,”² as Mr. Poole suggests. But while he catches its rhetorical intent—which by the way is common to much management-speak and business jargon—he is too busy alleging progress can never be made in business to notice the source of its rhetorical power. For, unlike the anodyne, directionless vagueness of “in future,” going forward implies motion, action, and, most importantly, direction. There’s a reason the preferred coinage is not “going backward.” While I do not mean to freight this modest phrase with unwarranted profundity, the idea of purposeful action and progress is central to most management and business communications, for even the dullest businessperson realizes the biggest risk in any large organization is inertia. “In future” implies no imperative. “Going forward” does.

2. Drill down
I hope Mr. Poole’s other writing is not as drab and inventionless as his literal equation of “drill down” with “look at in detail” implies. If so, I’d probably find reading Her Majesty’s Government’s telephone directory more thrilling. Drill down is a wonderful metaphor, incorporating geological and investigatory overtones of impressive metaphorical power. Drill down implies there are layers to penetrate, mysteries to uncover, complexities to map. Drilling down requires energy, focus, and effort, and drilling attempts to uncover both buried history and the structure under the surface. Drill down is a term of due diligence, where the intent and practice is to gain a deeper understanding of a business or other phenomenon you do not already understand. Drilling down is not what some passive paper pusher with an eye on the clock does; drilling down is what an explorer does. Mr. Poole’s puerile metaphor of drilling as sexual penetration doesn’t even come close. Nobody I know who has used the term has ever used it with such a leer in their voice.

3. Action
I cannot disagree with Mr. Poole that “verbings” are anathema. My personal bête noire is that horrid specimen “to impact.” (As far as I am concerned, only teeth get impacted.) But I would note that verbings are not restricted to business. And, unlike many forms of jargon or specialized argot, verbings do nothing to enrich language with metaphor or rhetorical power, and the real English phrases they replace are not much longer, if at all, so they provide no useful economy or speed of expression. In almost every instance, they are just evidence of linguistic (and mental) laziness. A pox on them, I say.

4. End of play
Not being a native of the Sceptered Isle who learned what bubble and squeak was at Mary Poppins’ knee, I cannot say whether “end of play” is truly a corporate Britishism or merely a phrase Mr. Poole misheard from his friend in the steno pool at British Land. In any event, it sounds much more to me like a phrase from sport, which, if Mr. Poole had ever spent time in a corporate environment, he would recognize as one of the prevailing metaphors of business. While I myself am skeptical that sport provides useful or revealing metaphors for business, I find it odd to associate it with childhood or “infantilized workers.” Unless Mr. Poole thinks the billions of pounds at stake in the Premier League are somehow childs’ play.

5. Deliver
Honestly, what does Mr. Poole have against delivery? Was his uncle a disgruntled Royal Mail employee? Delivery, while itself being inoffensive to most human beings, carries the useful implication that the person delivering the goods is often not the person responsible for their production, which many times takes place at different places at the hands of different individuals. And yet—as we may surmise by the fact that real individuals, including non-businesspersons, pay real money to postal services and parcel express carriers to deliver items they themselves did not produce to arrive on time and in good condition—the act of delivery itself carries value and merits attention. Finally, as service providers such as Yours Truly occasionally use the term, “deliverables” is a useful abbreviation for all sorts of preliminary, interim, and finished work products (yes, I went there) that are due at specified times in specified sequence in a complex process involving multiple parties over an extended period of time. I would much prefer to use the all-encompassing abbreviation “Deliverables” than an exhaustive laundry list like “Teaser, Non-Disclosure Agreement, Confidential Information Memorandum, Buyers List, Process Letter, Definitive Agreement, and Closing Schedules, if, as, and when appropriate” in everyday communications with an M&A client, for instance. Can you blame me?

6. Issues
How typical for a Brit to identify the generous, inclusive, and expansive term “issues” with “problems.” I remember how revelatory I found it early in my career to discover that many natives of Old Blighty would respond to the proposal of almost any new business idea or process with the prefatory throat clearing, “Ah. The problem is...” It could be the national anthem. Yes, “issues” can be euphemism for problems, but it can also mean consequences, implications, outcomes, preconditions, or almost anything else upon which there might be differing opinions or which should be discussed. Business is complex, business is riven by ineluctable uncertainty, and business is riddled with myriad issues. Not every issue is a problem, but, by its very nature as an issue, every issue must be addressed. This, by the way, is what the quotidian practice of the business world consists of: the identification, discussion, and resolution of issues. “Problems.” Pshaw.

7. Leverage
Yes, I suppose I and my fellow baby seal murderers in the financial profession are responsible for the glamorization of “leverage,” if not directly for its introduction into non-financial contexts. What can I say? Leverage is indeed a powerful concept, based, strangely enough, on the mechanism of the lever (to which Mr. Poole alludes), which the last time I checked my high school physics text meant a hell of a lot more than “use” or “exploit.” Application of a lever—like a corporate capability, say—in certain contexts can generate far more powerful outcomes than the application of brute force. It depends on the context, specifically the presence of a fulcrum. In certain circumstances, certain corporate attributes can be far more effective and powerful than a simple evaluation of their standalone properties might suggest. Of course, in finance the identification of the lever and the fulcrum is simple and comes prepackaged in the capital structure (where the presence of debt enables a much smaller quantity or force of equity to perform much more effectively than by itself). I suspect the identification and exploitation of coherent levers and fulcrums is more problematic outside of finance than in, but is that not why they pay corporate executives the big bucks?

8. Stakeholders
Bleeding heart anti-business lefties should be delighted that businesses at least pay lip service to the notion of stakeholders. The concept really means all those individuals and organizations who have an ongoing stake in the performance and actions of a corporation, including employees, customers, vendors, suppliers, governments, and yes, even security holders. The concept that a firm has obligations to all of its stakeholders is real and serious enough that the gimlet-eyed archons of capitalism on the Delaware Court of Chancery have specifically enjoined corporations to support it and protected them from ravening shareholders and plaintiffs attorneys when they have. “Stakeholders,” of course, replaces the archaic notion that only the interests of equity shareholders—the nominal “owners” of a corporation—matter to the conduct of a firm. It’s a good word, and an important concept. The fact that certain firms use it as a smokescreen for less savory behavior is less a criticism of the neologism than one of bad actors.

9. Competencies
Okay, I concede this one. “Competencies” is just lame.

10. Sunset
Again, Mr. Poole projects a monochrome shadow of a living word on a blackboard and complains the image is flat and uninteresting. Sunsets are slow, gradual, and predictable. Sunset implies that a project will tail off gradually over time, dying a slow and natural death as resources are consumed or withdrawn. Sunsets are not sudden and violent deaths. Only a business tyro would think that every business project either continues full strength or is taken out behind the chemical sheds and shot. Business projects have life cycles. Pace its deplorable construction as a verbing, sunset is a perfectly acceptable and descriptive metaphor for a common business action. We are not all Mother Teresa or the Terminator.

* * *

In fact, Mr. Poole’s jeremiad is in general a deplorable exercise in sneering incomprehension. He seems to have no insight or understanding whatsoever that the metaphors embedded in management-speak are not incidental but rather central to their purpose and continued usefulness. He glances passingly at the notion that they might be primarily rhetorical devices, but then he ignores this key insight for childish cheap shot-taking. His principal objection to the professional argot of an occupation he does not share seems to be that it offends his sense of linguistic and literary propriety.

Sure, like any language—English, for example—management-speak can be used “to deflect blame, complicate simple ideas, obscure problems, and perpetuate power relations.” But that is a function of language. And make no mistake: bureaucratese is its own language. Or, to be more precise, its own idiom. Idioms evolve organically among the members of a group sharing common interests and concerns to better communicate those very interests and concerns. This can take the form of abbreviation, where a commonly understood word or phrase can convey an entire sentence or conversation; motivation, where a word or phrase is understood to inspire action; or community-building, where the word or phrase triggers thoughts and actions of allegiance and commonality among its audience. These all necessarily exclude people outside the in-group, but this does not need to be a sinister thing. Try to follow a conversation among particle physicists in the Cal Tech lunchroom one day if you doubt me.

Human society is complex and highly specialized. It should be no surprise that we have erected our own Tower of Babel of mutually incomprehensible idioms, even within the English language, in order to cope. If nothing else, management-speak and other specialized idioms thrive because they are efficient: they save lots of time which conversationalists would otherwise waste in trivial itemizing and explication of concepts, notions, beliefs, and the like which they already share and understand. Business speak, like many other idioms, shares the additional motivation that it is primarily a rhetorical device, designed to summon and direct the energies of hundreds, thousands, or even hundreds of thousands toward the pursuit and execution of common goals which the rest of society does not necessarily share. Its practitioners really don’t care what unwashed outsiders think about it.

Perhaps Mr. Poole fails to understand that management-speak is not directed at him, nor at any other person not invested in the success of the organization which uses it (which probably includes many of the clock-watching wage slaves in its employ). Like the costume of the Papua New Guinean mud man to Bertie Wooster, our argot may appear harsh, awkward, even ridiculous to him, but that is simply because he cannot understand its true import and meaning. Saying business jargon is awkward is like complaining that white lies are untrue: accurate, as far as it goes, but it misses the entire point.

Besides, Steven, we all have our little communications quirks, innit?

Related reading:
Steven Poole, 10 of the worst examples of management-speak (The Guardian, April 25, 2013)
Hail Mary, Full of Grace (May 26, 2011)

¹ An easy and deserving target, I am careful to admit.
² I would not dream of criticizing the eccentric British tendency to drop prepositions and definite articles willy nilly from common phrases for some inexplicable classist motive of their own: “go down [to] the pub,” “in [the] future.” So I will just move on, silently.

© 2013 The Epicurean Dealmaker. All rights reserved.

What Infinite Ocean

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 21 Apr 2013 16:30:00 +0000

“Men, finding no answers to the sunnan [the ten thousand religious questions from the Shari-ah] now apply their own reasoning. All men seek to be enlightened. Religion is but the most ancient and honorable way in which men have striven to make sense out of God’s universe. Scientists seek the lawfulness of events. It is the task of Religion to fit man into this lawfulness.”

* *
“Much that was called religion has carried an unconscious attitude of hostility toward life. True religion must teach that life is filled with joys pleasing to the eye of God, that knowledge without action is empty. All men must see that the teaching of religion by rules and rote is largely a hoax. The proper teaching is recognized with ease. You can know it without fail because it awakens within you that sensation which tells you this is something you’ve always known.”

* *
“Religion must remain an outlet for people who say to themselves, ‘I am not the kind of person I want to be.’ It must never sink into an assemblage of the self-satisfied.”

— Frank Herbert, Dune

With our cities and our lights, pale and ridiculous reflections of the heavens above, I fear too many of us have cut ourselves off from one of the greatest and most beautiful reminders of our own insignificance.

It has been too many years since I have lain out shivering under the stars on a clear, dark, cold night, far away from the city’s glare. Lay there long enough, and I remember feeling pressed against the ball of the Earth, suspended above an infinite ocean of stars with no sensation of up, down, left, or right. Only clear indigo emptiness stretching away forever beyond my reach, out there.

I never look up from the pavement anymore. I miss the stars.

© 2013 The Epicurean Dealmaker. All rights reserved.

Weekend Interlude

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 15 Apr 2013 00:33:00 +0000

Berndnaut Smilde, Nimbus D'Aspremont, 2012

IV. DEATH BY WATER

Phlebas the Phoenician, a fortnight dead,
Forgot the cry of gulls, and the deep seas swell
And the profit and loss.

A current under sea
Picked his bones in whispers. As he rose and fell
He passed the stages of his age and youth
Entering the whirlpool.

Gentile or Jew
O you who turn the wheel and look to windward,
Consider Phlebas, who was once handsome and tall as you.

— T.S. Eliot, from The Waste Land

As that other inevitability approaches tomorrow, do not forget the Boatman. Nobody ever said on his deathbed he wished he’d spent more time preparing taxes.

© 2013 The Epicurean Dealmaker. All rights reserved.

How Can We Know the Dancer from the Dance?

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 30 Mar 2013 16:41:00 +0000

Henri Matisse, La Danse, 1910

I.
πόλλ' οἶδ' ἀλώπηξ, ἐχῖνος δ'ἓν μέγα

The fox knows many things, but the hedgehog knows one big thing.

— Archilochus
II.
Science is the characteristic product of our culture. Similarly, understanding where science fits in – metaphysically, epistemologically, morally, aesthetically and otherwise – is our characteristic philosophical problem; we’ve been working on it since Descartes. As of now, the hardest part is to reconcile a physicalistic ontology with the apparently ineliminable multiplicity of discourses that we require when we try to say how things are. Wilson thinks this appearance of tension is unreal. He suspects that if we resist consilience, that’s because we’re suffering from pluralism, nihilism, solipsism, relativism, idealism, deconstructionism and other symptoms of the French disease. Well, maybe, but I for one plead not guilty. It seems to me that scientific Realism is quite compatible with the view that events fall into revealing and reliable patterns not just at the level of micro structure but at many different orders of aggregation of matter. The heterogeneity of our discourse would then correspond to the heterogeneity of levels at which the world is organised, and both might well prove irreducible.

Everything is physical perhaps, but surely there are many different kinds of physical things. Some are protons; some are constellations; some are trees or cats; and some are butchers, bakers or candlesticks. For each kind of thing, there are the proprietary generalisations by which it is subsumed, and in terms of which its behaviour is to be explained. For each such generalisation, there is the proprietary vocabulary that is required in order for our discourse to express it. Nothing can happen except what the laws of physics permit, of course; but much goes on that the laws of physics do not talk about. It would not be entirely surprising if the explanatory apparatus that our higher-level theories require in order to say the sorts of thing that physics doesn’t, cross-classifies the taxonomy that physical explanation employs. Maybe this kind of picture is a viable alternative to consilience. Or maybe it’s not. Or maybe both are wrong. Or maybe it’s still too soon to tell.

— Jerry Fodor ¹
III.
However, the point which is most significant in the present context is that all these laws of nature contain, in even their remotest consequences, only a small part of our knowledge of the inanimate world. All the laws of nature are conditional statements which permit a prediction of some future events on the basis of the knowledge of the present, except that some aspects of the present state of the world, in practice the overwhelming majority of the determinants of the present state of the world, are irrelevant from the point of view of the prediction.

— Eugene Wigner ²

Physics in particular and the natural sciences in general constitute a remarkable intellectual accomplishment of the human race. While they are by definition neither invulnerable to challenge nor complete, they allow us to describe and predict a broad range of physical phenomena with astonishing accuracy and precision. They have enabled tremendous industrial and technological development, as well as allowing us to express the baser part of our natures with distressing power and efficiency.

But as Eugene Wigner explains, their success in large part depends on laserlike focus on only those phenomena which can be described with the explanatory apparatus they possess. Physics and the natural sciences succeed by ignoring particulars they deem irrelevant to their purpose and focusing on a limited number of real or hypothesized invariances which they can understand and manipulate. The present location of a carbon atom does not matter to particle physicists’ prediction of its mass, regardless of whether it resides in a coal seam thousands of feet underground, an air molecule exhaled from an athlete’s lung, or a patch of pigment on the surface of a Matisse painting.

And yet, outside the laboratory, factory, and classroom, the class of particulars which physics and its brethren ignore make up the vast body of phenomena and things which human beings experience every day. Variance is the main concern of our waking lives, not invariance. Variance is what most of us seek to understand, explain, and manipulate most of the time.

The natural sciences’ ability to describe the infrastructure of the world—what matter and energy do, and how we should expect them to behave—is a triumph of our species, and undeniably useful. But physics and chemistry and cosmology stand mostly mute before a painting or a concerto. They reveal the physical origin, composition, and interaction of the components, and how certain photons or sound waves propagate from the pigment or instruments, but they can explain almost nothing that really matters ³ about a work of art. Nor, what is more, about an election, a culture, or a civilization.

* * *Science is our best shot at explaining the constraints of our universe: what is possible, and what we should expect when events occur. Science may even be able, one day, to explain the origins and functioning of consciousness. But unless you believe the entire history of the universe, including all the thoughts, decisions, and actions of conscious beings everywhere, is completely and ineluctably predetermined by the physical facts of our universe, science will never be able to predict or explain the workings of our will. And our will, arising in an as-yet unexplained fashion from electrochemical reactions inside the spongy matrix of our physical brains, is what in turn affects and even alters the physical universe itself. Physical Matisse assembled physical objects to create that painting, then, in that fashion. Why? What does it mean to us? To you? How will that historical fact about that created physical object affect you? What are you going to do about it?

And if you don’t think a primitive figurative painting by a long-dead Frenchman matters much in the scheme of things, consider the atom bomb. Men and women decided to make that, too. Science tells us virtually nothing about why they did so, other than the relatively trivial fact that they could.

Many scientists scoff at philosophy, psychology, and cognate disciplines as empty gibberish, obscurantist mumbo jumbo.⁴ This is a mistake. Such disciplines are humans’ attempts to describe, explain, and, on occasion, even predict the constraints, facts, and nature of our consciousness and how it interacts with the world. This is not a trivial or misguided undertaking, for our consciousness affects the world, too.

Writing on science, Thomas Henry Huxley said,

To a person uninstructed in natural history, his country or sea-side stroll is a walk through a gallery filled with wonderful works of art, nine-tenths of which have their faces turned to the wall.

Do not make the same mistake about the life of the human mind. Otherwise, you will pass through life incapable of actually seeing any of the paintings turned toward you.

Related reading:
Sovereign Triviality (November 19, 2011)
Pixels Don’t Breathe (May 17, 2011)

¹ “Look!,” London Review of Books, Vol. 20 No. 21 (29 October 1998), pp. 3-6.
² “The Unreasonable Effectiveness of Mathematics in the Natural Sciences,” Communications in Pure and Applied Mathematics, Vol. 13, No. I (February 1960).
³ Yes, that is a value judgment. Explain value judgment to me using science. Comprehensively. I’ll wait.
⁴ Mind you, some of it is. There is bad philosophy and bad psychology, just like there is bad science. It comes with the territory of being human.

© 2013 The Epicurean Dealmaker. All rights reserved.

Curriculum Vitae

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 11 Mar 2013 00:53:00 +0000

Such a clever Toad.

Nec species sua cuique manet, rerumque novatrix
Ex aliis alias reddit natura figuras.
Nec perit in toto quidquam, mihi credite, mundo,
Sed variat faciemque novat: nascique vocatur
Incipere esse aliud, quam quod fuit ante; morique
Desinere illud idem; quum sint huc forsitan illa,
Haec translata illuc; summa tamen omnia constant.

No species remains constant: that great renovator of matter
Nature, endlessly fashions new forms from old: there’s nothing
in the whole universe that perishes, believe me; rather
it renews and varies its substance. What we describe as birth
is no more than incipient change from a prior state, while dying
is merely to quit it. Though the parts may be transported
hither and thither, the sum of all matter is constant.

— Ovid, Metamorphoses, XV, 252–258

It occurred to me the other day while trimming a pensive cigar, O Dearly Beloved, that, while I have slain (or hopefully at least severely incommoded) many dragons in these pages and sacrificed many billions of pixels on the Altar of Knowledge for the benefit of your education and illumination, I have perhaps been remiss in one important respect. I have written at length as to how (and why) a hopeful supplicant might enter the grand and glorious vocation of investment banking, and I have dilated at even greater length on what grizzled old veterans such as myself do once we have achieved our cushy sinecures therein. But I have distinctly overlooked the steps by and through which an eager young tadpole fresh from the leafy groves of academe transforms him or herself into a hoary old bullfrog barking orders and swilling scotch from a gilded lily pad.

This, I freely confess, is a lamentable oversight. For the metamorphosis through which said tadpole transforms itself into said bullfrog is neither simple, obvious, trivial, nor pain-free. Many (most, really) are the novitiates entering the holy precincts of my industry who never take their final vows, and few indeed are those who manage not only to climb the slippery pole to the even slipperier platform of Managing Director but also, mirabile dictu, to stay there. A young tadpole, just starting out, would be wise to learn the path lying ahead of her before she chooses to undertake such a harrowing journey. Let this post, then, serve both for my penance and your edification.

* * *

So, let us say our aspiring tadpole has done everything right in her first 22 years, developing sufficient proof of intelligence and superhuman extracurricular talents and activities to have persuaded both an elite university and subsequently a prestigious investment bank to welcome her into their ranks. She, being both a clever reader of these pages and allergic to onion cheeseburgers for breakfast, elects to join the corporate finance and M&A department of her bank, rather than the boys’ locker room on the sales and trading floor.^1,2 After submitting to the usual hazing rituals of fingerprinting and her bank’s formal training program, our heroine collects her building pass and makes her way to her cubicle as a newly minted

FINANCIAL ANALYST

Now the actual specifics of our novitiate’s duties and day-to-day activities will depend quite heavily on her bank’s organization and practices when it comes to Financial Analysts. Some will put her directly into a dedicated product group, like mergers & acquisitions, where she will be tasked with supporting senior M&A bankers in executing transactions alongside other bankers. Others will place her in an industry group, like Healthcare or Energy & Power, where her job will be to support industry-focused bankers who originate and execute all sorts of deals for their clients, including M&A, capital raising, and the like. Still other banks will put her in a large analyst pool, where she will be one of many analysts loaned out on a case-by-case basis to support bankers from different groups across all of corporate finance and M&A.

In general, however, these minor details don’t matter for our purposes here. A Financial Analyst’s job is to support senior bankers, from Managing Director on down, and to do whatever they ask her to do. Most of the time, this involves doing research, maintaining and updating various databases, creating or modifying financial models for specific transactions or a range of related companies (known as “comparables”), and editing and producing tons and tons and TONS of presentation books. Analysts work under close supervision by Associates (the next rung up) and sometimes Vice Presidents, who supply the content of each presentation or related work product (at the direction of their superiors) and who check the Analysts’ work for completeness and correctness. Analysts, being bright-eyed, intelligent, but largely clueless young things who usually look like deer in headlights or zombies on Adderal, almost never travel and rarely get to attend client meetings. When they do, they virtually never speak and are only there to hand out the presentation books to other attendees. At the biggest banks, an Analyst may only see her Managing Director once a year in the distance, like some mythical unicorn, and only read about her clients in The Wall Street Journal.

Analysts tend to work the longest hours, are in the office late every weeknight and most weekends, and rarely see the light of day. If shit flows downhill, Analysts are the ones at the bottom collecting and processing it every day before they hand it back up the chain of command, hopefully prettier and less aromatic than when they received it. Analysts are cannon fodder.

Now, because of this, you can see that a successful Analyst must have several important traits. She must be intelligent, patient, hardworking, relentless, unflappable, diplomatic, self-sacrificing, and forbearing. She must always maintain her equanimity, even in the face of a spittle-flecked Associate berating her for not correcting his misspelling of the client CFO’s name in a presentation book or a Managing Director who looks at her blankly when she asks how the meeting she skipped Christmas Day with her family to prepare the book for went (the client cancelled). It helps if she is a wizard with Excel or Powerpoint or Capital IQ and is a great stickler for detail (like saving her misspelling Associate’s ass). It is extra good if she is innovative and comes up with new ideas for doing things, better financial models, or even a clever suggestion for something even her MD has not thought about on a deal. Taking initiative and asking for more work is like whipped cream with a cherry on top.

What she is not expected to do is come up with the ideas her seniors pitch, cold call new potential clients, manage transactions, or sell. Most Analysts are hired for a specific stint of two years, after which they are encouraged to move on. Most do: some back to business school for an MBA, some to clients or other industries, and a few—usually the most proficient modelers and most eager deal junkies, natch—directly to private equity, where they will trade client service kneepads for a spot on the bottom rung of a financial sponsor and the dream of becoming another Steve Schwarzman or Leon Black. Increasingly, many banks have begun to encourage their top Analysts to stay on for a third year, and sometimes even a fourth plus a field promotion to Associate, if both they and their seniors are willing. It makes sense: why lose your best-trained, most competent people to business school or the competition?

* * *

The next rung up the investment banking ladder for our aspiring tadpole is

ASSOCIATE

In large part, the Associate’s job is very similar to that of the Analyst, with the exception that the Associate has both the authority to delegate and direct Analysts in their work and the responsibility to get the output right. Associates tell Analysts what to do, when to do it, and check their work when it is done. They take their marching orders from Vice Presidents and above. Associates are, to mix another metaphor into my bloggy blender, the corporals of the investment banking world. Sure, they have authority over the privates, but they spend their lives taking fire in the same foxholes the Analysts do. If an Analyst is not available or cannot do the work, the Associate does it herself. Associate hours look almost indistinguishable from Analyst hours. They spend their early years neck deep in the same shit.

The difference is that most Associates are hired into banks straight from business (or other graduate) school. This often leads to the amusing situation where a newly-minted MBA without prior banking experience, like Yours Truly in his early years, is supervising a highly-trained second-year Analyst who knows approximately 500% more about every topic, tool, and method we are supposed to be using for an assignment than I do. In such cases, a certain humility and facility for fast learning is indispensable. An Associate must also learn to manage up as well as down. It is the Associate who has to tell the frantic Vice President or imperious Managing Director that, no, spreading the entire S&P 500 over the weekend is neither possible nor a good use of overstretched junior resources, no matter what they think Warren Buffet might like to see (if only they could get him on the phone). Associates are also expected to participate in more client meetings and the occasional travel, while still keeping their mouths shut, so they can begin to absorb industry knowledge and sales tips and tricks from their betters. Plus carry their superiors’ bags.

Associates, of course, are the most junior investment banking professionals who have actually taken final vows. Unlike Financial Analysts, many of whom sign up for a two-year stint to get a prestigious job on their résumé, make some money, then light out for the territories never to be seen again, Associates are expected to be lifers. Unlike Analysts, they usually start their careers specializing in a particular product area (like M&A or Leveraged Finance) or industry coverage group. They are expected to learn not only how to make flawless pitch books and financial models and manage the Analysts supposedly doing the work, but also the ins and outs of their groups’ business, clients, competitors, and transactions. Depending on the size and staffing of their banks, they may be asked to interact directly with lower-level employees at their clients’ companies on routine relationship or deal matters. They normally take first-line responsibility for making sure all the endless minutiae of investment banking transactions, both internal and external, move as planned.

In order to succeed, our Associate must make sure everything she is asked to do comes out perfect and on time. She must take the initiative to look for more work, since there is always more work to do, and she must begin to learn enough about her profession to offer intelligent, insightful observations and suggestions when they are helpful. She must learn to manage a very wide range of high-strung personalities under conditions of extreme pressure. The Associate must aspire to be (and be seen as) the ultimate safe pair of hands. Associates do not have responsibility for maintaining existing client relationships or developing new ones, and they have no sales or revenue responsibilities, but they are attached to the success of their group and their department in a way no Analyst is. The Associate is responsible for both her performance and the performance of her subordinates, but Associate is the first role in my industry where a professional is expected to grow out of her role and into the next one. Being an Associate is the first real step on the ladder of apprenticeship in my business.

* * *

If all goes well with our tadpole’s development, sometime within four to six years she should be promoted to

VICE PRESIDENT

Vice President, as the rather pompous title implies,³ is the first time a banker is truly expected to become a real expert in something: an industry, a product type, a set of clients. In exchange for insulation from the day-to-day grind of shit farming in the trenches with the Associates and Analysts, a Vice President is expected to start coming up with ideas for her group’s clients, start writing most of the group’s presentation materials, and start supporting her Managing Director much more closely in sourcing and originating deals. A Vice President is expected to attend most client meetings and begin to contribute meaningfully in many. A VP is also expected to take lead execution responsibility in-house and out for active deals, and is usually the point person a client CFO interacts with daily during a live transaction. While it is unusual for Vice Presidents to source new client relationships or live deals, it is entirely expected they will assume an increasing share of the burden of maintaining existing ones. Vice Presidents often become the glue for their groups and act as clearinghouses for administrative tasks as well as growing into more of a sales role in support of their MDs.

Vice Presidents are not expected to do basic research, program or update financial models, proofread presentation materials, or nitpick production details like fonts, color schemes, or graphics formats. In other words, they are not expected to do Analyst and Associate work. However, like all investment bankers, they are responsible for the work produced under their watch, so if a VP’s Analyst and Associate produce crap work, it is up to the VP to fix it, even if that requires her to pull an all-nighter doing so. (In which case, the Associate and Analyst better watch their asses.) Vice Presidents are also not expected to generate revenues independently, although their performance getting and executing deals in support of their MDs is important enough that they can begin to enjoy meaningful performance bonuses in line with the group’s success.

Because the nature of the job shifts so dramatically from anal-retentive, in-the-weeds detail mongering to actual independent thought, interpersonal relationship cultivation, and growing sales responsibilities, the transition from Associate to Vice President is the most fraught for many investment bankers to manage. The very intellectual and personal qualities which make you an attractive and effective candidate for Analyst or Associate become increasingly irrelevant, only to be replaced by interpersonal skills and predilections which are often fundamentally at odds with your prior role and responsibilities. For this reason alone, we see substantial attrition, both voluntary and involuntary, in Vice President ranks across my industry. It is not for nothing my fellow Associates and I made fun, shortly after we arrived, of an aging Vice President at my first firm, who could not seem to make the transition. We dubbed him amongst ourselves a “very, very good Associate.” He did not last long.

I have said it before: the higher you get in my business, the more it becomes pure sales. Vice President is when a banker really begins to see the truth of this remark for herself, and it is when she (and her bank) must make the determination whether she has the goods to continue.

* * *

Finally, after four to seven years of flogging herself and her bank as a Vice President, the successful frog finally breaks through and becomes a

MANAGING DIRECTOR⁴

At this level, which is mine, the job morphs completely into pure commodity sales. Managing Directors’ one and only responsibility is to bring in revenue, in the form of deal fees, and they do it any way they can. Some of us become product experts, like M&A or Leveraged Finance gurus, who have no clients of our own but who are indispensable to MDs who do have clients that want our products. We execute transactions which generalist MDs cannot, and we get to split the fees and the credit for our efforts. Some of us get to know an industry backwards and forwards, making ourselves better informed about the strategy and operations of that industry’s participants than any one of them could possibly become themselves (since competitors, duh, don’t talk to each other). Others of us cultivate and maintain new and existing relationships with paying customers, wining, dining, and schmoozing the drunken sailors who weave across the landscape, dispensing dollars, pounds, and euros for transactions large and small. Such MDs’ highest and only purpose in life is to be relationship bankers. At the biggest banks, these MDs act as concierges for the product and industry experts in their ranks, introducing their clients to the people who can actually execute the deals in question. At smaller banks and boutiques, relationship bankers usually pick up the tools and execute the deals themselves, as well.

It doesn’t matter. The only rule for Managing Directors is to bring in the simoleons. That is our job.

As you might expect, we don’t pay attention to the details of our presentation materials or the day-to-day minutiae of live transactions. As soon as we land a new deal, we are off, looking for the next one. We don’t get paid for hand-holding, relationship building, deal-doing, or advice-giving until and unless said activities result in legal tender clearing our employer’s bank account. Of course, some of us do pay attention to such non-revenue trivialities, if only because we play a long game in which delivering on your promises, providing good quality service, and sticking to your word actually affect your ability to make money in the future. But the point is we do not proofread our presentation books the night before the big pitch, unless something is seriously wrong. The best investment bankers don’t need presentation books to win deals. The best meetings I have had have been ones where I did not even open the book. Yes, I am that good, but, no—too—the printed materials really aren’t that important. After all, if I wanted to sell glossy presentation books I’d work for Kinkos.

* * *

Of course, above my rank there are Group Heads and Department Heads and Division Heads and the Executive Committee of the bank—not to mention the C-suite—but that is not an arena in which I am really interested in playing. Above the revenue-generating Managing Director level, your job becomes one of politics first and foremost, not finding, developing, and serving clients. Some people love that shit, and some are very good at it. Not me.

But if you are one of those people whose life ambition is to become Jamie Dimon, you don’t need or want my advice anyway. In fact, it was probably you who slipped the knife between my shoulder blades while I was writing this.

I thought I felt a twinge.

Related reading:
A Corporate Finance Bestiary (March 13, 2010)

¹ Those among you who are in fact fond of onion cheeseburgers or who have other reasons to prefer the generally faster-pace and shorter hours of the trading floor will likely have to look elsewhere for your education on what the evolution of a new recruit into a senior salesman or trader looks like. While the titles and the raw material are largely the same, the day-to-day job and career paths are foreign enough to my experience that I would do you a disservice if I pretended to know what they are like. Sorry.
² By the way, I’m not making up the bit about onion cheeseburgers for breakfast just to be a prissy corporate finance asshole (although I’m probably that, too). Michael Lewis relayed it as a key plot point in describing Lew Ranieri and his mortgage-backed securities traders in Liar’s Poker. Look it up. To be fair, I haven’t smelled one on a trading floor in years, so those dietary habits may no longer exist. You never know, though. And it is a great dig.
³ It is no coincidence that the investment banking role which first entails meaningful client contact bears the title Vice President. After all, VP actually means something in the real world of non-financial corporations, where Vice President posts tend to be relatively rare and occupied by seasoned professionals. It is my industry’s sop to the poor 55-year-old Chief Financial Officers who have to talk daily with our 30-year-old VPs in the course of billion dollar IPOs and ten billion dollar mergers. At least they can kid themselves that they have the ear of a senior officer of their bank. (There are approximately umpty billion Vice Presidents in my industry, and approximately none of them have signatory authority.) We learned this trick from the commercial bankers, by the way.
⁴ Often (usually? why would I care?) there is a transition step between VP and MD entitled Director, Executive Director, or Principal. All you need to know is that this role is a hybrid between Vice President and MD, with hybrid responsibilities and characteristics. Just mix the two in your mind, and I’m sure you will be able to follow the plot. After all, you’re a clever person: just interpolate.

© 2013 The Epicurean Dealmaker. All rights reserved.

She’s Trading Her MG for a White Chrysler LeBaron

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 02 Mar 2013 22:58:00 +0000

Path dependency is a bitch.

— Unattributed

Diligent readers of these pages will recall I first addressed the relative paucity of women in investment banking (and the related area of private equity) well over five and one-half years ago. I addressed a number of commonly-held arguments why this might be so, and I rejected most of them for the assertion, based upon my own experience and perception, that there are few women in my industry because most women are simply not interested enough in becoming or remaining an investment banker. Acknowledged in my argument were the indisputable facts (to me, at least) that a) those women who did stay and make careers in corporate finance or M&A were at least as tough, competent, and successful as their male peers and b) the often impossibly demanding nature of the job made me wonder why anyone of any gender would want to stay in it if they did not have to.

I also pointed out that the mostly American investment banks I’ve belonged to have made sustained and (in their eyes) heroic efforts to redress this imbalance ever since the mid-1990s, if not before. While sustained attention and encouragement to boosting the hiring of women and other minorities¹ did increase their uptake of female university and business school graduates into entry-level analyst and associate classes, it seemed most banks simply could not hang onto the women they hired. Additional measures were taken, including outreach through corporate and extra-corporate affiliation groups like 85 Broads, more aggressive recruiting on business school and college campuses, and internal sensitivity programs geared toward eliminating sexist and other discriminatory behavior as well as dampening down the traditional frat house atmosphere common in many parts of banking, especially the trading floors. Unfortunately, from what I can tell, none of these measures seems to have had much success. In fact, there seems to be approximately the same number of women in investment banking now that there was at the beginning of the 1990s, before the industry itself began to swell like a tick on a dog and (related, maybe?) investment banks began to realize they better increase the diversity of their professionals.²

Now we have actual data out of the United Kingdom which confirm the lack of progress in this area:

For every woman in a UK Financial Services Authority controlled function at a top global bank operating in the City of London there are, on average, five men in similar positions, according to Financial News analysis. FN looked at the gender split at the top-10 banks operating in the UK, based on the Thomson Reuters league table for global investment banking fees in 2012. This group comprised JP Morgan, Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, Deutsche Bank, Barclays, UBS and Wells Fargo.

A few things are worth noting about this report. First, while the bankers being tallied all work and/or are registered in the UK, virtually every bank on the list is domiciled in America or Europe. Only little old Barclays, after its ingestion of Lehman Brothers in the U.S., flies the Union Jack for Britain. So, while we might guess some of this stasis could be put down to the allegedly less evolved attitudes toward women in the UK banking sector,³ we cannot ignore that the culprits in question are global banks with robust global diversity and recruitment policies which are supposed to militate against such outcomes. Second, the FSA controlled function filter is a good one. It captures most everyone who actually qualifies as a “front office,” client-facing investment banker or trader, as opposed to file clerks, IT support people, and other back office and staff drones who can only legitimately claim to be an “investment banker” when they are buying a £300 bottle of vodka for clueless university co-eds at a Soho nightclub. This is important, for the presence of women in non-client-facing, staff positions in investment banking is disproportionally high.⁴ Last, the proportion of women in FSA-controlled positions in investment banking is disturbingly unchanged at only 18% from the first time the FSA collected these statistics in December 2001.⁵

These figures are broadly consistent with my own anecdotal experience over the course of my career. I cannot and will not speak for the sales and trading side of the house, or proprietary trading, but in my hermetically sealed world of corporate finance and M&A the gender balance has stuck roughly in this neighborhood for the last 20 years or so I have belonged to the investment banking guild. At each firm I have belonged to, the number of women in middle-level or senior client-facing or money-making roles has always amounted to ten percent or less of their peer group. The ones with seats are good, aggressive, successful bankers, just like almost every one of their colleagues, but they were and are scarce, notwithstanding almost two decades of determined efforts by most of these banks to boost their number.

The burning question, of course, is why.

* * *

The easy answers—that investment banks actively discriminate against women, that the investment banking “boys’ club” constitutes an unreconstructedly hostile environment for women, or that investment banks are indifferent to improving their gender balance—are demonstrably wrong. Just reading that Financial News article should disprove the first and last of these. I can assure you from personal experience on recruiting and hiring committees that the banks I’ve worked at have gone out of their way to recruit and hire more women, even to the extent of favoring them over other, equally talented male candidates. If you are a smart, driven, aggressive woman, you have an advantage getting into investment banking. Trust me: every bank from Goldman Sachs on down will put its thumb on the scale on your behalf.

The question of environment is a more nuanced one. It cannot be questioned that investment banking—even in the supposedly hushed, buttoned-down precincts of corporate finance and M&A, where I work—is a tense, aggressive place marked by high stakes, intense pressure, and occasionally treacherous infighting. In the not-so-distant past, it also cannot be denied that this environment, dominated as much as it has been by men, often degenerated into cursing, yelling, and fratboy-ish misbehavior likely to offend women, or worse. Overt sexism and sexual harassment were prevalent, just as they were in many industries in this country, and men in positions of power made fools of themselves at women’s expense. But it has been many years since investment banking management has been willing to ignore such hijinks. Now, every bank of size has extensive formal diversity programs and sexual harassment policies in place. These policies have put an end to all kinds of subtle and overt discrimination and behaviors that women and other minority groups might find offensive. Gone are the days when banks turned a blind eye to bankers entertaining clients at strip clubs, Managing Directors hitting on their subordinates, or employees emailing pornography around the corporate intranet. These things still happen every now and then, of course, but when they do the victims have a ready and willing ear for their complaints and the offenders are often fired on the spot.

The tension and aggressiveness of the business remains, however. Given the stakes and money involved, that will never change. But anyone who thinks women cannot succeed in an environment characterized by high pressure performance expectations, political jockeying, and the occasional streak of bad language obviously does not know a lot about women. The successful women bankers I know give as good as they get. What remains can only be characterized as “hostile” by people who cannot tolerate high pressure work environments. That applies to most people, regardless of gender. If that applies to you, we in the industry continue to invite you not to apply for a job in our pressure cooker, no matter what form your personal plumbing takes.

* * *

It is true, as the FN article states, that the number of women who join corporate finance and M&A straight out of college or business school has climbed to a substantially higher percentage than it was in the past. (It remains well short of parity, though.) As I look around my floor, I see women comprising much more like 30 to 40% of the junior bankers below the level of Vice President. I get the sense that this is common across the industry.

We hire less than half of our incoming analyst classes from among women, notwithstanding equal or near-equal gender balances in university populations, because fewer qualified female candidates apply than men. Part of this is due to fewer women enrolling in business, finance, and economics majors, which puts them at a comparative disadvantage relative to men from those same programs. While I have stated in the past that I think extensive prior exposure to finance and accounting is highly overrated as a job qualification for corporate finance or M&A—and I still believe it—I cannot deny that not having those qualifications when everybody else does reflects poorly on a candidate’s demonstrated interest in my profession. It is hard to trust a potential employee has the drive and ambition to spend 100-hour weeks, weeks at a time, modeling and preparing financial presentations when they have not demonstrated significant commitment to similar work in their coursework. And the key criterion we select for in my business, alongside general intelligence and drive, is a burning desire to be an investment banker. Speaking from experience, you have a much higher hill to climb to convince a bank recruiter you have this when the most extensive exposure to numbers you can relate is the time you indexed a professor’s monograph on 19th Century Catalan poetry.

Even in business school, where credentials are more evenly distributed, it seems fewer women in each class apply to investment banks than men. In the dark ages when I got my MBA, there were lots of women in my class, but virtually none of them applied to banks. They opted for marketing, international business, or general corporate roles instead. Perhaps that has changed in the interim, but we can’t hire women if they don’t apply for a job in the first place.

But the real question, nowadays, is why, having hired women into a third or more of our junior professional positions, less than half of them stay as they rise in the ranks.

* * *

One answer could be that, notwithstanding banks’ mostly successful efforts at eliminating overt sexism and discrimination, women get tired of dealing with and/or get shown the exit early due to covert, subconscious, or institutionalized sexism. In other words, senior male colleagues and peers discriminate against women without even knowing it, say, by assigning them lower quality projects, more difficult clients, or impossible bosses. It is certainly possible. Women are scarce in investment banks, so few male investment bankers get to work with, for, or opposite them and thereby have any conscious or unconscious prejudices proved wrong. If embedded sexism exists, it may well be self-reinforcing. But this ignores the project-based, episodic nature of our work, which is very hard to manipulate, the extraordinarily important influence of luck on real and perceived success, and the fact that an important skill in investment banking is learning how to make lemons into lemonade. At a junior level, superior performance is measured by a relentlessly positive attitude, hard work, attention to detail, and an eagerness to do anything and everything your superiors want and need. At more senior levels, where a banker begins to manage clients and deals directly, performance is measured directly by monetary results, which depend not only on effort and intelligence but also on luck. Both of these sets of criteria are largely in the control of each individual banker, and their evaluation is public enough that it would be very difficult to consistently manipulate it in a sexist or discriminatory fashion.⁶

Another answer may be that the duration, timing, and demands of an investment banking career are simply incompatible with many women’s other important interests. In particular, while an analyst typically has a two- or three-year stint directly after college, after which most are encouraged to leave and get an MBA (and some elect to make the jump into private equity or hedge funds), a woman entering investment banking as an associate after business school can anticipate at least a decade before she can begin to exercise some measure of control over her life. Associates usually start in their mid- to late twenties, spend three to five years before promotion to Vice President, and then spend four to seven years or more getting to Managing Director. All during that time, they work incredibly long hours, travel like maniacs, and basically do not have any personal life to speak of. For many women, this span from their mid-twenties to their mid-thirties coincides with what they envision as the period when they will get married and start a family. While this is true for many men, also, I think most of us can agree that committing to a career in investment banking is a much more fraught and difficult decision for a woman than it is for a man. This stage is also one when junior bankers are not making enough money to make it feasible to hire full time help to care for young children. A female Vice President is certainly physically capable of having a baby while traveling 150 days a year and working upwards of 80 hours per week, but unless her spouse or partner is rolling in dough him- or herself (or willing to stay at home), she simply will not be able to afford to outsource its care.

A final answer may lie in the nature of my business itself. As I have explained many times before, corporate finance and M&A are extremely expensive, intangible commodity services. They are not sold or bought on the basis of superior service quality (which is effectively impossible to determine, either ex ante or ex post) or price (which is largely uniform across providers). The services we sell (mergers, IPOs, LBOs) tend to be extremely important and very frightening to our customers, who tend to be infrequent and inexperienced buyers of those services. Accordingly, they usually rely on two chief factors to choose their service provider: the bank’s own brand name and reputation, and their trust in the senior banker pitching for the business. Trust, and the relationship it is built on, can only be cultivated over time between a banker and a client who are in some important ways sympatico. Among the features which drive such sympathy, we must surely include personality, background, common interests, and compatibility. It is not unreasonable, at least to me, to think some clients would accordingly be more comfortable selecting an investment banker who happens to be more like them; that is, one who is also a man or woman. One would certainly expect this effect to be strong among sexist men.

To the extent this last factor has any effect on the selection of investment bankers by clients, which I would argue it does, at least at the margin, we might be able to explain why so few women succeed as high-powered corporate finance or M&A bankers. It may be because, as we all know, so very few of the CEOs and board members selecting investment bankers in this country tend to be women themselves, and so many of the men in those positions are sexist bastards.

In other words, the problem of too-few women in senior investment banking positions is likely to be much bigger than investment banking. You’re just not gonna be able to replace the QWERTY keyboard with another goddamn seminar.⁷

Related reading:
Richard Partington, Gender split little changed for a decade (Financial News, February 26, 2013)
Fingernails that Shine Like Justice (May 21, 2007)
Mine’s Bigger Than Yours (April 14, 2007)
Recipe for Success (October 19, 2007)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)

¹ Relax. I mean minorities in my historically white, male, Caucasian industry. Just checking to see if you’re paying attention.
² Economists and social scientists alike will be displeased to learn I am basing my perceptions of gender imbalance in my industry, then and now, on anecdotal evidence witnessed and collected firsthand by Yours Truly and trustworthy firsthand sources known thereto. That being said, however, I do get around. Also, if there has been a firm or two comprised primarily of Amazon warriors conducting distaff investment banking in relative obscurity for the past 20 years or any portion thereof, I must say they’ve kept a damn tight lid on it.
³ Alleged by a small number of female investment bankers who have lived and worked in both the US and the UK and not disputed strenuously by the males I’ve discussed it with. While attitudes have apparently changed, some of the stories I’ve heard from London trading floors in the 1990s would make the most determined American male chauvinist’s toes curl.
⁴ The difference between client-facing, revenue-producing or line positions and staff positions is critical. The former generate all the money; the latter, while critical, only support line workers as they make money. Line workers, like salespeople everywhere, make much more money that staff workers. Line departments are profit centers; staff departments are cost centers. Investment banking employment of women is dominated by staff positions: administrative assistants (almost 100%), human resources (almost 100%), legal and compliance (probably much more than 50%), finance, and administration.
⁵ From the Financial News article:

There were 16,034 individuals holding controlled functions at the top-10 banks at the end of January this year. Of these, the gender of 249 employees could not be identified due to unclear data. Of those who could be identified, 12,959, or 82%, were men, while only 2,826, or 18%, were women.

To add to the discomfort of this stark imbalance, FN analysis also shows that little has changed in more than a decade.

At the end of December 2001 – the first year in which the FSA kept a register of approved persons – the same 10 banks employed a total of 15,469 employees in controlled functions. The gender of 268 of those employees could not be identified due to unclear data. Of those who could be identified, 12,422 were men, or 82%, and 2,779, or 18%, were women.

As an aside, I find it intriguing how little changed the absolute number of controlled persons is from 2001 to present. I would be very interested to see a time series of this data over the intervening decade.
⁶ Perhaps some women get discouraged by the senior women already in positions of power in the industry, as a recent study of professional women in other industries suggests. I have not seen this in action (although why would I?). However, it goes contrary to the fact that junior bankers tend to work with a number of senior bankers, men and women, and talented bankers have more flexibility to find a satisfactory working relationship both within their own firm and at competing firms. Junior women do not get automatically assigned to female senior MDs.
⁷ Which isn’t to say, naturally, that we shouldn’t try. I’m on record for getting more women into the industry. We need the talent. I’m just saying we won’t be able to do it all by ourselves.

© 2013 The Epicurean Dealmaker. All rights reserved.

Of Unexpected Death

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 24 Feb 2013 00:53:00 +0000

Pieter Bruegel the Elder, Landscape with the Fall of Icarus, ca. 1558

Wherever your life ends, it is all there. The utility of living consists not in the length of days, but in the use of time; a man may have lived long, and yet lived but a little. Make use of time while it is present with you. It depends upon your will, and not upon the number of days, to have a sufficient length of life. Is it possible you can imagine never to arrive at the place towards which you are continually going? and yet there is no journey but hath its end. And, if company will make it more pleasant or more easy to you, does not all the world go the self-same way?

— Michel de Montaigne, “That to study philosophy is to learn to die,” Essais

Many years ago, perhaps before I first had children or certainly not much later, I often had occasion to walk across the pedestrian bridge which connected the Winter Garden of the World Financial Center in Battery Park City with the World Trade Center complex. The Winter Garden, for those of you unfamiliar with it, is a large, glass-enclosed atrium which overlooks both the site of the former World Trade towers on the east and the Hudson River and Battery Park City boat marina on the west. It is a curious, echoing space, formed from the gap between two of the office towers which make up the World Financial Center, windowed over with arching glass and metal, and rather incongruously punctuated with sixteen large palm trees planted inside in four rows along its long axis. When I frequented it, Battery Park City was still only half-developed, and the portion of the artificial landfill lying north of Vesey Street on which it sat was indifferently and incompletely developed. Now, of course, the northern part of the area is fully built out, with office buildings, schools, residential towers, and the gleaming new world headquarters of the investment bank Goldman Sachs.

The Winter Garden remains, but the glassed-in pedestrian bridge which connected it across West Street to the World Trade Center complex beyond—leading one down stairs or escalators into the bowels of the underground Concourse which covered the Trade Towers’ footprint in a maze of shops, restaurants, and even deeper escalators into the PATH train station to New Jersey—is gone, partially destroyed in the collapse of 9/11 and fully removed thereafter. The Winter Garden entryway which led to it is now closed, taken up instead with informative displays and tourists overlooking the reconstruction site of the new Freedom Tower and memorial gardens for the towers. It is a rather forlorn place architecturally now, a formerly busy entrance and exit which has been reduced to a window box on past horror and future resolve.

The bridge is gone now, as I said, but it was fully open and functional one rather unremarkable day many years ago when I crossed from the Winter Garden on my way east, on an errand or errands unremembered. About a quarter of the way across, as I walked 20 or 30 feet above the busy highway that was and is West Street, I noticed something which made me stop and stare. Stopped in the left lane almost underneath the bridge was an empty gray or green cargo van. In its front hood was a deep, v-shaped dent, and ten or so feet in front of it, on the ground, lay a motionless form underneath a light-colored tarp. A police car parked perpendicular to traffic with its lights flashing and long, s-shaped skid marks on the asphalt told the basic story: a pedestrian crossing the road had been hit by a speeding van, and the momentum of the car had carried it and its victim a good 150 feet before it skidded to a stop. You could fill in the rest, if you wanted to. The corner of West and Vesey was a bad one, with many blind spots—the plot where Goldman Sachs now stands was an empty lot. It would be easy to speculate the pedestrian had started across a green light in front of a stopped car, and the van, which sped up to catch the light, barreled through the red light and hit the unseen person just as he stepped in front of it. Or perhaps the pedestrian, as so many of us New Yorkers are wont to do, decided to jump the red light and cross against it, judging he had time to beat the speeding van or simply never seeing it in the first place. In any event, the outcome was clear. The only comfort one could take, if comfort it was, was the likelihood that the victim died instantly. You could guess this from the fact that two empty men’s shoes still lay in the crosswalk, 150 feet from where his body eventually ended up.

* * *

Now this incident from 15 to 20 years ago made a deep impression on me, as you can clearly tell. I have told it over and over to my children growing up, as a cautionary reminder that more pedestrians are killed in New York by cars than any other cause, and I have tried to remember its teachings myself as I negotiate the crowded streets of Manhattan in a state of constant hurry and distraction. But I mention it here now for two specific reasons. The first was the incident, reported on Twitter and the news earlier this morning, that Cambridge police had been alerted to a possible shooter carrying a gun and wearing body armor on the campus of The Massachusetts Institute of Technology. A good high school friend of my daughter goes there, so my wife and I spent an anxious half hour texting and calling her parents to warn them and offer help. Fortunately, the report turned out to be unfounded, and her parents had been fully informed throughout, but the incident reminded me of the helpless, anxious panic a parent can feel when their child is in deadly danger far away.

The second incident was when we found out later this morning that an acquaintance we know socially was recently killed by a runaway truck. A woman younger than me, with a husband and two children, struck down in an accident as horrifying as it is common. Two other deaths among people we know, within the past six months, have made this, in my son’s phrasing, a really terrible year. Yet they died from common (though unnatural) causes, too: nothing exotic, nothing unusual, just a fast, irrevocable snuffing out of lives which left little but sadness and horror in their wake.

* * *

Educated people are supposed to know that car accidents, self-inflicted gunshot wounds, and bad eating habits are much more common killers than the rare and exotic deaths which terrify us. Your chances of dying in a mass school shooting, an airplane crash, or a shark attack are infinitesimal compared to the quotidian killers which stalk our daily lives. And yet people have been shown to massively overestimate the danger from rare threats and massively underestimate that from common. The people who point this out usually decry it as irrational, stupidity that causes us to make bad decisions which are suboptimal for our survival. Perhaps they are right.

Yet in two real senses this skewed perception of our own deaths is completely sensible, if not completely rational. The first is that the most common sources of unnatural death—like automobiles and fatty foods—are almost ineluctable elements of our daily lives. They are embedded in the woof and warp of society in such a way that it is extremely difficult, if not impossible, to remove them from your life entirely. So we soldier on, pretending not to notice they exist, pooh-poohing the likelihood of their occurrence with the common dodge that such things happen to other people, not to us. Until they do happen to us, or to people we know. When that happens, it is no comfort to realize that such things happen all the time, that the death of your friend or loved one—or your own impending demise—is just not that unusual, just not that special.

The second sense why we miscalculate the likely source of our own death is simply the undeniable fact that, as each of us experience it, our own death is unique. It is unitary and indivisible. It is the only one we have to offer. Statisticians can blather on all they like how an individual’s chance of dying ex ante from Source X is only 1 in 37 million. That does not mean that 1/37,000,000th of your, my, or anyone’s death is going to come from Source X. If Source X kills you, your ex post chance of dying from it is 1 in 1, or 100%. Saying that only 1 in 37 million dies from something does you absolutely no good when you are that one.

I think most people understand this, deep down, if only subconsciously. We all realize, with Falstaff, that we owe God a death. That our death, however inconceivable and unpleasant to contemplate, will happen. But I think most of us would prefer an easy, quick death. Perhaps even one unseen and unexpected, from a common cause just lying in wait right around the next corner. Not from some awful, exotic, harrowing oddity that will both terrify and mark us with strangeness as it kills us. I think I speak for most of us when I say we’d prefer a nice, quiet, homey death. One we are not unfamiliar with.

One we can greet, at the end of the day, almost as an old friend.

© 2013 The Epicurean Dealmaker. All rights reserved.

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 17 Feb 2013 00:37:00 +0000

Willem de Kooning, Excavation, 1950

And so to my third contention: we overvalue new writing, almost absurdly so, and we undervalue older writing. I feel this market failure keenly each day when I recommend a fine piece of writing that deserves to be read for years to come and yet will have at most two days in the sun.

You never hear anybody say, “I’m not going to listen to that record because it was released last year,” or, “I’m not going to watch that film because it came out last month.” Why are we so much less interested in journalism that’s a month or a year old?

...

Online, that distinction disappears – or it should. You can call up a year-old piece as easily as you can call up a day-old piece. And yet we hardly ever do so, because we are so hardly ever prompted to do so. Which condemns tens if not hundreds of thousands of perfectly serviceable articles to sleep in writers’ and publishers’ archives, written off, never to be seen again.

— Robert Cottrell, Net wisdom

The art and practice of blogging lives in the moment. It is ephemeral, reactive, both responsive and contributory to what Frank Herbert, the author of that wise sociology and psychology manual Dune called the “ghafla distraction.”

It should be easy to mine the corpus of a blogger’s work for buried treasure. The tools are all here: hyperlinks, index labels,¹ search boxes. Anything you want should be a mere mouse click or three away. Time, location, and dry rot play no role in the storage and retrieval of digital works archived in gleaming photons and electrons. But I know from personal experience that we do not do that. We view blogs as resolutely and ineluctably topical things, articles and ideas of the moment. They daily float down the river of information, entertainment, and distraction that races past our doorstep. We pick them up sometimes as they pass and turn them over in our hands, perhaps adding our own thoughts and reactions to the stream, but ultimately we toss them back in, almost never to revisit them again. I know: I have saved hundreds of articles and blog posts to read again in my browser’s favorites folder, but I almost never go back into that disorganized, daunting mess to pull up the one I dimly remember.

So I have decided to experiment here, creating a topical index or table of contents for posts which I feel are worth saving and rereading. It will be composed of posts that I think are worthwhile, not necessarily ones which have generated the most page views or reader reaction. And I will organize them by topic so a reader looking for posts on private equity, Goldman Sachs, or humor can find what I consider to be the most worthy neatly arranged in one clean, well-lighted place. I expect I will revise this post intermittently, and I will link to it from the home page from the masthead “About This Site.”

I encourage interested readers who wish to nominate posts or topics for inclusion here to email me their suggestions at epicureandealmaker [at] hushmail [dot] com. Visit early and often, and enjoy.

And if any of you benighted creatures ever doubted that I have a tendency toward prolixity, let this modest catalogue persuade you otherwise. Cheerio.

* * *

[Last revised, amended, or added to: March 17, 2013]

INVESTMENT BANKING
A. The History and Nature of the Industry

Go West, Young Sheik (September 12, 2007) – Networks
The K-T Boundary (September 16, 2008) – Ancient and recent history
It’s Not the Meat, It’s the Motion (July 15, 2009) – Boutique-land
Nature Red in Tooth and Claw: Part I (September 24, 2009) – My magnum opus
Nature Red in Tooth and Claw: Part II (September 25, 2009) – Opus, part 2
Nature Red in Tooth and Claw: Part III (September 28, 2009) – Opus, part 3
Nature Red in Tooth and Claw: Part IV (September 29, 2009) – Opus, conclusion
A Client Is Not a Counterparty (November 27, 2010) – Market-making vs proprietary trading
A Victim of Soycumstance (September 24, 2011) – The fundamental tension at the heart of investment banking
Three’s a Crowd (March 19, 2012) – The problem with shareholders

B. The Vexed and Contentious Issue of Investment Banker Pay

Eat the Bankers (January 9, 2008)
Armageddon Rag (January 15, 2008)
Armageddon Outta Here (January 16, 2008)
The Pressure Room (January 16, 2008)
Just When I Thought I Was Out (January 21, 2008)
Penny for the Guy (February 26, 2008)
Ring, Ring! It’s the Cluephone, for You (October 30, 2008)
Five Pound Box of Money (February 9, 2009)
Never Say Never (September 9, 2009)
The Root of Some Evil (January 8, 2012)
Defending the Indefensible (September 22, 2012)

C. Initial Public Offerings and Other Arcana

Mine’s Bigger than Yours (April 14, 2007) – Why league tables matter
Recipe for Success (October 19, 2007) – M&A is like book publishing
True Story (December 7, 2007) – Are fairness opinions really necessary?
Killing People Is a Bad Habit (August 28, 2009) – Engagement letters
Come Fly With Me (February 12, 2011) – Business travel
Eight Reasons Not to Hire an M&A Advisor. And One Reason to Do So (May 14, 2011)
Jane, You Ignorant Slut (May 21, 2011)– IPOs
Dan, You Pompous Ass (May 22, 2011) – More on IPOs
Size Matters (March 21, 2012) – IPOs, redux
As Long as the Right People Get Shot (May 30, 2012) – Even more—heaven help us—on IPOs

D. Getting in and Staying in

Wherein I Go Mosquito Hunting with a Howitzer (October 12, 2009)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)
In the Nation’s Service (December 29, 2011)
Can’t Buy Me Love (April 29, 2012)
The Rules (November 29, 2012)
Curriculum Vitae (March 10, 2013)

THE DISTAFF SIDE

Fingernails that Shine Like Justice (May 21, 2007)
Thank You for Smoking (August 6, 2010)
She’s Got Legs (June 11, 2011) – Fashion advice
Too Funky for Me (August 31, 2011) – The market for erotic capital
Miss Lonely Hearts (November 26, 2011)
She’s Trading Her MG for a White Chrysler LeBaron (March 2, 2013)

PRIVATE EQUITY AND OTHER INIQUITIES

Cognitive Dissonance (January 25, 2007)
The Beginning of the War Will be Secret (April 30, 2007)
Tax Breaks for Everyone! (June 14, 2007) – Carried interest
J’accuse (June 15, 2007)
J’accuse, Part Deux (June 27, 2007)
The Taxman Cometh (July 11, 2007)
B(ogus Ta)X (July 13, 2007)
You All Know Brutus and Cassius Are Honorable Men (June 4, 2011)
All’s Fair... (January 15, 2012)
The Rape of Persephone (January 29, 2012)
Too Much Is Never Enough (October 2, 2012)
It’s a Helluva Town (October 20, 2012)

RISK MANAGEMENT AND OTHER CRISES

Not Far Now (May 11, 2007)
Nobody Expects the Spanish Inquisition (May 24, 2007)
Marks in the Sand (June 28, 2007) – Mark to market
The Great Chain of Being (August 2, 2007) – Leverage and market contagion
Grains of Sand (August 10, 2007) – Contagion, redux
Why So Serious? (December 10, 2008) – Math blindness
You Realithe, Of Courth, Thith Meanth War (May 3, 2009) – The Chrysler kerfuffle
More of a Kickin’ Sitcheyation (May 11, 2009) – Chrysler, redux
Conventional Wisdom (January 20, 2010) – Keynes and the problem with liquidity
All Together Now (January 22, 2012) – Information asymmetry and opaque finance
A Good Offense (April 22, 2012) – Sometimes a hedge is just a hedge
50 Ways to Leave Your Lover (June 10, 2012) – Risk doctors, not risk managers

FIRMS AND PERSONALITIES
A. Goldman Sachs

Overheard at 85 Broad Street (June 18, 2008) – Reputation
The Dirt Bag Chronicles (January 22, 2009) – Reputation, redux
The Fish Stinks from the Head (June 30, 2009) – Culture
The Mouth of Sauron (February 17, 2010) – Public relations
Hypocrisy as a Business Model (March 15, 2012) – Culture, redux

B. Steve Schwarzman

L’État, c’est moi (February 12, 2007) – The Party
The Self-Made Man Club (March 19, 2007) – The Party, redux
The $7 Billion ~~Mouse~~ ... er ... Man (June 13, 2007)
Penny Wise (August 2, 2007)
Does This Profile Make Me Look Fat? (February 7, 2008)

C. Others, Not Elsewhere Classified

Taxonomy (January 14, 2007) – Carl Icahn
Oxymoron (October 13, 2007) – Investment banking “management”
To Catch a Thief (February 13, 2009) – Psychopaths
Primus inter Pares (October 16, 2009) – RIP Bruce Wasserstein, the “Father of M&A”
A Good Start (January 19, 2011) – Lawyers
J.P. Morgan and the Marlboro Man (May 20, 2012) – Jamie Dimon

PHILOSOPHY AND AESTHETICS

L.H.O.O.Q. (July 29, 2007)
Bubble Land (May 13, 2008) – A semiotic analysis of Blackstone Group’s annual report
We Get Mail! (December 18, 2010) – Reading advice
Pixels Don’t Breathe (May 17, 2011)
Kindle This (February 20, 2012) – Books and ereaders
Chesterton’s Fence (March 5, 2012) – A useful intellectual talisman
Breakfast in Fur (June 24, 2012)
A Painting Is Not a Refrigerator (October 6, 2012)

ACADEMIA AND ITS DISCONTENTS
A. Its Noble Purpose

First, Let’s Shoot All the Philosophers (April 22, 2011)
Sovereign Triviality (November 19, 2011)
In the Nation’s Service (December 29, 2011)
The Standard Model (February 18, 2012)
No Country for Young Children (October 21, 2012)

B. Its Sordid Financing

Et in Arcadia Ego (November 11, 2008)
VA • NI • TAS (July 21, 2009)
H is for Hedge Fund (July 22, 2009)

HUMOR AND OTHER SELF INDULGENCES

T-Bone the Metaphor (September 10, 2008)
A Heartbreaking Work of Staggering Hubris (April 15, 2009) – Book proposals
Cogito, Ergo Whom? (February 25, 2012) – Private equity gets philosophical

NOODLINGS, JEREMIADS, AND EFFLORESCENCES, NOT ELSEWHERE CLASSIFIED

Dance, Monkeys, Dance (March 24, 2007) – Blogging and the internet
Not Safe for Work (April 25, 2008) – Cusswords
Molon Labe (September 1, 2008) – Investment bankers as Spartans
Poachers Turned Gamekeepers (March 16, 2010) – My solution to the regulatory crisis
American Baby (May 1, 2010) – A little hopeful flag-waving
It’s All How You Look at It (July 18, 2010) – The sources and uses of wisdom
Occupy Galt’s Gulch (May 8, 2012) – Contra Ayn Rand and her acolytes
Skin in Which Game? (February 10, 2013) – On pseudonymity

ABOUT YOUR HUMBLE BLOGGIST

The Investment Banker in Winter (April 7, 2009)
Fragments (February 26, 2010) – My writing habits
Biting the Hand that Feeds Me (November 22, 2010)
Do You Trust Me? (February 23, 2011)
Sympathy for the Devil (February 27, 2011)
Wherein Your Droll, Semi-Victorian Bloggist Jumps the Shark (January 8, 2013)

¹ Yes, yes, I know. I have made it a point here to index most of my work with evocative rather than descriptive (or even helpful) labels for perverse reasons of my own. But I ask you: is it any easier or more conducive to search these pages or anywhere else with the term “investment banking” rather than “The Life”? Do you actually do so? I didn’t think so.

© 2013 The Epicurean Dealmaker. All rights reserved.

Skin in Which Game?

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 10 Feb 2013 19:01:00 +0000

A thing I never know, when I’m starting out to tell a story about a chap I’ve told a story about before, is how much explanation to bung in at the outset. It’s a problem you’ve got to look at from every angle. I mean to say, in the present case, if I take it for granted that my public knows all about Gussie Fink-Nottle and just breeze ahead, those publicans who weren’t hanging on my lips the first time are apt to be fogged. Whereas, if before kicking off I give about eight volumes of the man’s life and history, other bimbos, who were so hanging, will stifle yawns and murmur “Old stuff. Get on with it.”

I suppose the only thing to do is to put the salient facts as briefly as possible in the possession of the first gang, waving an apologetic hand at the second gang the while, to indicate that they had better let their attention wander for a minute or two and that I will be with them shortly.

— P.G. Wodehouse, The Code of the Woosters

So, this happened a couple days ago:

@epicureandeal Hello; is it from lack of courage that you conceal your identity? No skin in the game? Are you a coward or am I mistaken?
— Nassim N. Taleb (@nntaleb) February 7, 2013

I’m not quite sure why Mr. Taleb, with whom I have had only rare and intermittent interaction over the years, chose to throw down the gauntlet in such a fashion. Perhaps he did it in a fit of pique at a less-than-rapturous assessment of his latter work I offered in a recent interview. Perhaps he tried to embroil me in a twitter duel to attract attention and bolster sales of his book currently in publication. (I hear tell publishers encourage their authors to use social media in whatever way possible to promote sales.) Or perhaps Mr. Taleb, a famously combative personality, simply chose to pick a fight with an obscure financial commentator because he didn’t like the cut of my jib.

But no matter how titillating or intriguing one might find speculation about the personal motives or hidden agenda behind Mr. Taleb’s public utterance, or dislike the combative and insulting tone which a more sensitive soul might read into it, a mature and intelligent reader would put such distractions aside and attempt to address the question he poses.¹ For it is a valid question.

Let me answer it, then.

* * *

First, I think it important to note that, when all is said and done over the past six years, I have actually concealed very little of what is essential about my identity. In addition to clues large and small, direct and indirect, which I have scattered throughout these pages and elsewhere over the years, I have offered up rather lengthy essays on my origins, personality, and biases as well as a number of interviews conducted with people such as an advisor on trust-based selling, the members of a corporate law class, and a reporter for an online literary magazine. There also was, if memory serves, an interview conducted in connection with a minor article on the sources of the financial crisis published in The New Yorker.

The essential outlines of my personal and professional life are all here for the attentive reader to note: I am a middle-aged, Ivy League educated, male investment banker of 20 or more years experience who focuses on M&A and corporate finance, has worked at firms large and small, and lives and works in Manhattan, New York City in the company of a wife, children, and two dogs. I’m not quite sure what more you need to know about me. My name? My address? My employer? My social security number? What—pardon me for asking—the fuck for?

I assure you I am a real person, with all of those things, but none of that is important for what I share with you, here. This place, these words are all you need to know about me. My personal details are unremarkable, unilluminating, boring. If you found out my true identity tomorrow I guarantee you your reaction would be, “Who? Really? Huh.” Trust me: you’re not missing anything.

Of course the worry shared by many,² perhaps including Mr. Taleb, is that my persona and all the details I have shared with you here are some sort of elaborate scam or lie. There is of course no guarantee that this suspicion is not correct. (On the Internet, nobody knows you’re a dog.) But if it is a lie, constructed out of whole cloth, I would ask you to consider what for, to whose benefit? If I really am a 7-11 owner in Boise, Idaho or a junior accountant at a sponge factory, for what earthly purpose would or could I be constructing this elaborate fantasy? (And how the hell could I pull it off for six years, fooling almost everybody through the sheer force of words and invented experience that I’m someone I’m not?) If, on the other hand, it is a scam, designed to con people into doing or believing some things they would not otherwise do or believe if they knew who I am and what firm I work for, what exactly are those things? Given the variety, prolixity, and overwhelming volume of words I have spewed forth at this opinion emporium over the past six years, I dare you to find an agenda that could be cast in a suspicious or underhanded light. I double dog dare you.

Good friggin’ luck.

* * *

Pace the details of my real or assumed identity, the essentials of my worldview, morals, and intellectual perspectives are completely transparent. They form the very essence of this blog. And as I explained two years ago, concealing my identity interposes no barrier between my words and a reader’s thoughts, offers no bar to her ability to weigh, judge, and draw her own conclusions:

CHG: Let’s deal with one sideways issue, the question of anonymity. Some commenters on this blog have been critical of anonymous bloggers. I think anonymity can play some interesting roles, and in some ways can be critical. You’re an anonymous blogger; your view on the subject?

TED: Anonymity can indeed foster all sorts of bad, irresponsible behavior, and I am not in favor of it in general. But blogging (or even commenting on another blog) under a pseudonym, as I do, is very different. Anonymity means no identity; pseudonymity means a false or assumed identity.

For one thing, operating under a pseudonym allows one to build up a corpus of opinion that can be judged in toto. Third parties can develop an opinion of your credibility and the value of your opinions for the very reason that you present a consistent identity, that you do in fact have a name. That this name is false, and a mask, is more a matter of convenience and perhaps professional necessity than it is of deception.

If people judge my words and opinions interesting, provocative, and worthy, it does not really matter whether they know me as TED or Joe Smith. One can always worry that a pseudonymous commenter or blogger has an ulterior agenda, but I suspect that is both hard to conceal over a long period of time (I have been blogging for over four years) and, frankly, beside the point. I challenge you to find anyone commenting in public who does not have at least one unstated agenda. And yet we should be able to judge and evaluate each other’s contributions nonetheless.

I claim to be an investment banker with over 20 years experience in the business. I claim many other things besides. Neither you nor anyone else really knows this to be true or not, and yet I hope my words and opinions themselves have earned me a measure of trust in this respect that a resume or a photograph would not add to. Perhaps I am naïve, but I believe that, given enough time, trust can be built upon words alone. My entire career testifies to that belief.

So why do I conceal my identity? It’s very simple: I want to keep my job.

* * *

Unlike certain public intellectuals who may have accumulated enough wealth through investing and writing bestselling books to enjoy the freedom of reading in bed for two years and stomping belligerently about the landscape lifting heavy stones, I have not. I continue to work as a trusted advisor to corporations and financial sponsors so I can support my family, my childrens’ schools, and the innumerable other wine merchants, bartenders, and cigar vendors who have attached themselves to me over the years. Unfortunately, this noble objective seems to be incompatible with ridiculing the follies and foibles of public figures within and without my industry, not to mention attacking the seemingly endless supply of dull, stupid, and irretrievably wrong commentators and journalists poisoning the well of public thought, while wearing my own name. Add to this the institutional paranoia of compliance and regulatory officials within employers like my firm, who suffer myocardial infarctions at the very thought of an investment banker like me communicating with the public in a non-approved, unsurveilled fashion, and you perhaps begin to see why my diffidence is less absence of courage than simple discretion.

For you see, Mr. Taleb, you are mistaken about the game in which I have put my skin at risk. My game is not to be a public intellectual. My game is to be an investment banker. In that game, believe me, I am all in. That being said, I have a brain, and judgment, and a clever pen, and I am not afraid to use them to advance arguments in the intellectual realm which I believe deserve to be heard. Just because I am not a combatant in the public arena under my own name, that does not mean I cannot fight there. If others are afraid to confront me because I wear a mask, I count that against their own courage, not mine.³

I have no hidden weapons or traps to spring on you or anyone else. My knife is right here, in my hand, in front of your face. En garde.

Related reading:
The Investment Banker in Winter (April 7, 2009)
Biting the Hand that Feeds Me (November 22, 2010)
Do You Trust Me? (February 23, 2011)
Sympathy for the Devil (February 27, 2011)
Wherein Your Droll, Semi-Victorian Bloggist Jumps the Shark (January 8, 2013)

¹ See what I did there? No? Well, keep reading then.
² There was a journalist, a few years back, who decided it was her mission to expose all those who commented on matters financial and public under pseudonyms, for the alleged reason that they were violating their employers’ regulations about communicating with the public. While this was strictly true, it was a very flimsy rationale, and the real reason for her zeal seemed to be some sort of unresolved personal spite. The matter passed, as matters do, and the only lasting casualty was the journalist’s own reputation. Nevertheless, I am sure you can appreciate how such emotional outbursts tend to discourage full disclosure among the pseudonymous commentariat, regardless of motivation.
³ There is another, less savory reason one can attribute to those who wish to unmask pseudonymous commentators: the desire to dismiss or denigrate hostile opinions expressed because the one offering them is not “qualified” by academic or intellectual pedigree to offer them. This is a particularly low and cowardly version of the argument from authority. Good ideas and strong reasoning are good and strong per se, whether or not they are offered by a 7-11 clerk or a middle-aged investment banker.

© 2013 The Epicurean Dealmaker. All rights reserved.

What’s Next?

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 03 Feb 2013 00:07:00 +0000

A beginning is the time for taking the most delicate care that the balances are correct. This every sister of the Bene Gesserit knows. To begin your study of the life of Muad’Dib, then, take care that you first place him in his time: born in the 57th year of the Padishah Emperor, Shaddam IV. And take the most special care that you locate Muad’Dib in his place: the planet Arrakis. Do not be deceived by the fact that he was born on Caladan and lived his first fifteen years there. Arrakis, the planet known as Dune, is forever his place.

— Frank Herbert, Dune

I began this blog slightly more than six years ago, O Dearly Beloved, for a vague and inchoate set of reasons I have outlined elsewhere and will not trouble you again with here. Over that span I have published 428 posts, excluding this one, and penned but binned or shelved almost a hundred more. Altogether I have sacrificed tens (if not hundreds) of thousands of innocent words to the monstrous appetite of my towering need to be heard. The range of material I have addressed here has been broad, too. So broad, one might legitimately question whether there is indeed either rhyme or reason to my writings. I have written lengthy treatises on the history and evolution of my industry, impassioned defenses of investment banker pay, excoriating jeremiads against villians great and small, diffident explorations of the roots of the financial crisis, self-indulgent ruminations on education, art, and philosophy, and ephemera and trifles too numerous and gossamer to mention. I have even written a movie review.

In almost all of these instances, my writing has been in reaction to current events, the behavior of financial actors, or the punditry and journalism produced by myriad others covering finance and various cognate and non-cognate fields. More often than not I write to correct, adjust, or amplify the words of others. A few of these efforts have evolved into online conversations, but most of them remain simply my own commentary and opinions. This is consistent with my original intent to model these pages as my very own Letters to the Editor section, wherein I could publish my opinions on current affairs without the tiresome blockage or interference of editors and other less-than-sympathetic characters.

But while I have achieved some small measure of success in this way, I would be dishonest if I did not reveal that I have become increasingly disenchanted with this situation. Part of this may be due to the siphoning off of my day-to-day outrage and commentary into my Twitter stream, which I find more than adequate to puncture or correct most of the petty inaccuracies and foibles I encounter. Part of this, for sure, is due to fatigue. After six years and hundreds of thousands of words on various topics, I find it hard to say anything new and tiresome to beat back a bad argument or sloppy facts with the same reasoning I have elaborated many times before. While it is certain I have changed my mind on many topics and my opinions in many areas have evolved, when it comes to the bulk of what I have written, I remain satisfied that I have written—if not the last word—at least very close to my last word on the topic. But as I am sure you can imagine, simply linking to prior published posts in reaction to new events and new opinions would be both bad blogging practice and stultifyingly boring.

So I am considering what, if anything, to do next. I modestly think there is a lot of good, interesting, and informative material hidden in the bowels of these pages, much of which I wrote before more than 13 people and their dogs became regular readers. I flatter myself that this material, properly edited, might actually generate some interest among a broader audience. But the blog format is a lousy method to present it, especially to a novice reader, since blogsites create online files which look more like unordered lecture notes than coherent arguments. Should I try to compile some edited subset of these writings into a book? The idea is intriguing, but I am conscious of both the extensive effort that would require on my part—who, sadly, still needs to satisfy the demands of my day job—and the ever-dimming prospects of book reading and book publishing in general.

I have come to no conclusions yet, and this navel gazing of mine may come to a screeching halt with the first outrageous idiocy I encounter on the internet which absolutely demands a double-barreled TED takedown. But I thought it only fair to let you, Dear Readers, many of whom have followed me for years with little to show for your patience, know what I am thinking.

Blogs, like many things, have a natural lifespan. I am trying to determine whether the next stage for this one is the morgue or a chrysalis.

I will keep you informed.

Possibly related reading:
A Heartbreaking Work of Staggering Hubris (April 15, 2009)

© 2013 The Epicurean Dealmaker. All rights reserved.

Where Angels Fear to Tread

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 31 Jan 2013 02:26:00 +0000

“Asps. Very dangerous. You go first.”

— Raiders of the Lost Ark

For a rapacious and unapologetic facilitator of the accumulation and redeployment of financial capital in the modern economy, I must admit in confidence to you, O Dearly Beloved, the perhaps surprising and somewhat disconcerting fact that I am an admirer of cogent Marxist analysis. While I remain unconvinced—and have been ever since some flaky antipodean professor/activist on sabbatical visited my college eons ago and completely failed to convince me his ideas had any practical political application whatsoever¹—that Marxism has much useful to say about the practical organization of social and political institutions to reduce economic repression and increase socioeconomic justice, I do believe its focus on the interaction of capital and labor can offer interesting insights into economic and financial issues of perennial interest.

Marx thought capital was important. I think capital is important. Perhaps it is less surprising than a naive observer might otherwise think that I find Marxist analysis occasionally insightful.

All of which is typically verbose preamble to the observation that I find the work of C.J.F. Dillow almost always interesting, provocative, and insightful. I read his blog Stumbling and Mumbling regularly, and I recommend those of you who can absorb a Marxist analysis on an regular basis without blowing a physiological or psychological gasket do the same. His views are cogent, well-supported with copious references, and almost uniformly thought-provoking.

That being said, however, I must take issue in these pages with one of the points Mr. Dillow advanced in a recent post. While tying his remarks to some recent research which showed a correlation between stock market investment and business investment, Old C.J.F. asserted that

a correlation between investor sentiment and capital spending might exist simply because rational expectations of the future determine both. If so, then current weak sentiment and weak investment are a sign of weak future growth.

But Lee and Arif’s work suggests this might not be so. They estimate that, in most advanced countries, high investment leads to weaker GDP growth and falling profits. That’s exactly the opposite of what you’d expect if sentiment and investment were rationally determined.

This leaves us with another possibility - that it is irrational animal spirits that drive sentiment and capital spending. And herein lies the point that is not widely made. It’s that the economy is being depressed in part by company bosses being irrationally pessimistic. We’re paying the price for stupidity in boardrooms.

But this equation of businesses’ failure to invest now, when economic conditions are depressed and, presumably,² opportunities for investment are particularly attractive, with irrationality, stupidity, and (thoughtless) “animal spirits” is cheap, sloppy, and simplistic. What Mr. Dillow seems to overlook is that business investment in any economy is characterized in large part as a collective action problem.

* * *

Businesses do not invest in existing or new business lines in a vacuum. In addition to exogenous factors over which they have no control and usually very little ability to predict, like customer demand, general economic conditions (including the exogenously determined market cost of the capital which it decides to invest), and competitive response, no business has the ability to predict with high confidence the actual financial or operational results of any investment. Businesses make investment decisions under often daunting conditions of significant uncertainty. When general economic conditions are weak or unsettled, as they are now, the uncertainties surrounding any investment decision are that much more worrisome.

Based upon my years of experience and interaction with senior business executives and company directors through both good and bad economic times, I can tell you with confidence business decisionmakers typically react to such conditions with the most natural, intelligent, and rational human response imaginable: caution. Failure to invest under conditions of economic malaise, recession, or disruption is not cowardly, stupid, or irrational. It’s often just plain common sense. Furthermore, executives and directors of corporations owe a fiduciary duty to their stakeholders to make rational and prudent decisions. If prudence dictates caution, who will gainsay a CEO’s or board’s decision to defer that new manufacturing line or acquisition until conditions become clearer? Who indeed, other than a central planner or politician who would like someone, anyone, to take the first step.

Now it is true that if every business in an economy exercises so much caution that they don’t invest, it will be difficult if not impossible for that economy to grow its way out of recession. This is well understood as the paradox of thrift. By the same token, when uncertainty decreases so much that every business feels comfortable investing in new capacity and new business lines, it is logical to expect the economy in total will suffer from overinvestment and subsequently sub-par returns. In aggregate, then, rational behavior on the part of individual businesses can lead to collective and individual outcomes that are suboptimal and, hence, in some fashion “irrational.” But this irrationality is a structural feature of the situation, not an individual failing of each independent actor.

We have an old riddle in the Colonies which may be unfamiliar to Mr. Dillow that captures the essence of my argument:

Q: How can you tell which settlers are the pioneers?

A: Simple. They’re the ones with arrows in their backs.

I am no apologist for the native intelligence of corporate executives or their directors. In this I agree with Mr. Dillow wholeheartedly. But let us not mistake the natural equilibrium outcome of independently derived rational decisions with individual irrationality or stupidity.

That is just dumb.

¹ Which failure to convince me and my classmates drove the loopy bugger to foaming-at-the-mouth distraction and encouraged him to beat a hasty retreat to more amenable climes once the semester was over. It is perhaps not unfair to note that my college was not a seething hotbed of sympathetic vibrations to such worldviews.
² Really? You want to bet your company on that (Warren Buffet-like) conventional wisdom? Be my guest. You go first.

© 2013 The Epicurean Dealmaker. All rights reserved.

Wherein Your Droll, Semi-Victorian Bloggist Jumps the Shark

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 08 Jan 2013 20:57:00 +0000

Let it never be said, O Dearly Beloved, that your Curmudgeonly Interlocutor is loathe to trot out his sesquipedalian stylings for the benefit and punishment of the broader world at large. Approach me in a suitably submissive and humble manner, bearing burnt offerings of fruit bats and breakfast cereals, and there is no telling what pearls of wisdom I might let drop from my coruscating lips.

Such were the tactics of one Charles Reinhardt, intrepid reporter from the literary hinterlands of Brooklyn, who approached me on behalf of his employer and online literary magazine Volume 1. Brooklyn. I must admit I initially considered his proposal of interviewing a semicoherent apologist for the financial industry on behalf of his distinctly hip, educated literary audience an intriguing, albeit unorthodox (and perhaps ill-conceived) project. But I am not immune to flattery. And I must own that the hook was set when I subsequently viewed his employer’s motto on the website:

If you’re smart, you will probably like us.

Well, of course then.

In any event, Mr. Reinhardt served up several appropriately non-financial softball questions for me to toy with, and toy with them I did. A sample:

How did the blog start?
The beginnings of my blog are shrouded in the mists of internet time. I dimly recall beginning to read certain online blogs like Marginal Revolution, Calculated Risk, and Going Private in the 2005-2006 timeframe and thinking–if not exactly that I could do that myself–that it might be quite nice to have my own soapbox. Part of it, I suppose, was driven by the sense I had that few people commenting or reporting online actually knew what the hell they were talking about when it came to finance. I thought I could actually add something valuable–or at least factual–to the conversation. Part of it was undeniably driven by boredom with the quotidian concerns and demands of my profession which, I am the first to admit, can be staggeringly sterile, routine, and blinkered. And part, of course, was driven by a desire to test whether I could write entertaining and informative prose, bolstered by the narcissistic conviction that I could. I started blogging in January 2007, and the world has been suffering miserably ever since.

There is much, much more. Go read it.

And if enough of you flatter my ego by reading it, I just may cancel my new project of selling artisanal cupcakes in Williamsburg on the weekends. Then again, maybe I won’t. I’m beginning to dig my new hipster cred.

Related reading:
Charles Reinhardt, The Bookish Banker: An Interview with The Epicurean Dealmaker (Volume 1. Brooklyn, January 8, 2013)

© 2013 The Epicurean Dealmaker. All rights reserved.

A Photograph, Not a Circuit Diagram

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 06 Jan 2013 20:25:00 +0000

Except in the simplest cases, one cannot expect observation alone to reveal the effect of the use of an aspect of economics. One cannot assume, just because one can observe economics being used in an economic process, that the process is thereby altered significantly. It might be that the use of economics is epiphenomenal—an empty gloss on a process that would have had essentially the same outcomes without it, as Mirowski and Nik-Khah (2004) in effect suggest was the case for the celebrated use of “game theory” from economics in the auctions of the communications spectrum in the United States.

— Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets ¹

By now, many of you may have already read Frank Partnoy and Jesse Eisinger’s lengthy, outrage-y article in The Atlantic about the ongoing horror that is bank accounting, and/or one of many, many responses and reactions to it. I will not try your patience (or mine) by addressing their each and every substantive argument, but I thought it might be useful to lay out in summary form here why I think the entire premise of their screed is wrongheaded.

First, I will take the liberty of condensing and paraphrasing Messrs. Partnoy and Eisinger’s 9,500 word confection for the benefit of those among you with limited time and attention spans:

Banks are opaque and hard to understand! This is scary! Even big, sophisticated investors don’t understand the risks big banks take! Financial reporting for banks is scary and complex and mystifying! To calm ourselves, we tried to understand stodgy, prudent Wells Fargo’s financial statements. What did we find? Wells Fargo is big, opaque, complex, and scary!! Even their friendly investors relations person could not or would not answer our questions! We are scared! What should we do? We should send more bank executives to jail for scaring us! Oh, and come up with better, more understandable financial disclosure! Otherwise no-one will ever, ever, ever invest in publicly traded banks again! And then, disaster!!

Sigh.

* * *

Before I begin, I think it is fair to concede our Cassandras’ contention that large commercial, investment, and universal banks² are highly complex, risky, and opaque institutions. It is also fair to say that most of the bad or downright naughty things which have occurred in the financial sector over the past several years (although not all; viz., Bernie Madoff) have bubbled up from the bowels of large, complex, opaque banks and their brethren. But the notion that there is some sort of magical accounting regime which could simultaneously shine sunlight into the deepest reaches of multi-trillion-dollar global financial institutions, clearly convey the actual and potential risks these institutions face or create in their daily operations, and therefore usher everybody into a new era of financial transparency, trust, and mint juleps on the sun porch is simply ludicrous. It completely misunderstands what accounting is and what accounting is for.

It is a rookie mistake.

First, accounting is—as Donald MacKenzie characterizes (academic) economics in the quote above— an epiphenomenon to the actual day-to-day activities which any business conducts. It is a way to keep track of the financial outcomes of a firm’s true activity, which is conducting business. It is passive, it is backward looking, and properly used under normal circumstances it drives none of the important business decisions or activities which firm executives pursue. When accounting consequences do drive decisionmaking, as in tax avoidance strategies or manipulating earnings, it introduces distortions into the underlying business which can lead to all sorts of economic inefficiences, up to and including fraud.

Accordingly, reading a set of financial statements can tell you very little about how to run an actual business. That is why every business of even modest complexity runs its own internal management information systems which provide the people running the show with real time, targeted information which they can use to make decisions. These systems have very little, if anything, to do with generally accepted accounting principles. The daily trading book and profit and loss statement for a Wall Street trading desk will bear little resemblance to the balance sheet and income statement of its investment bank parent. Of course at year and quarter end each desk’s results do get rolled up and reconciled into its parent’s consolidated financial results, but this process by necessity compresses and distorts the actual real-time, granular information used to run a business into standard, pre-approved accounting categories. In addition, the backward looking nature of accounting for the period just ended means the more dynamic and changeable an underlying business process is—for example, sales and trading at a securities firm—the more out of date and potentially misleading the reported numbers can be to the current state of the business.

And it is not a matter of simply providing more, more detailed information more frequently. Put aside the common tension that most businesses compete with others, and detailing too much information in publicly available accounts would undermine their competitive position. (This is particularly important for market-making investment banks.) No, such a strategy would increase the complexity of a firm’s accounts, which seems exactly contrary to Messrs. Partnoy and Eisinger’s stated objectives of greater transparency and shorter financial reports. Not to mention still not get at the idiosyncratic risk and business practices of each such firm, because it is the entire point of public accounting to standardize reporting to enable comparability across firms.

And this last gets directly at a critical point which seems to have eluded our intrepid reporters: what accounting is for.

* * *

For that is what public accounting is: a public accounting of the financial results of a firm for the benefit of external stakeholders of various stripes, including lenders, creditors, business counterparties, regulators, and investors. It is meant to be an intermittent report on the health and progress of a firm to potentially interested parties, filtered, standardized, and formatted into a presentation which can allow those parties to compare the firm to its peers and competitors both within and outside its industry. It is not meant to be a real-time profile of the actual business operations of an individual firm; nor is it meant to give outsiders such operational knowledge of the firm that they completely understand and perhaps could even run the business themselves. It is a report card, not a class curriculum or even lecture notes.

And you should not think that regulators—who we might indeed prefer to have much more detailed, real-time operational knowledge of systemically important risky financial institutions—are hobbled in any way by the limitations of their regulatees’ public financial reports. Securities and bank regulators always have intimate access to the current operations and results of firms under their supervision and, arguably, should have much more. But this is true whether a firm files public reports or not.

Lastly, Messrs. Eisinger and Partnoy’s concern for the confidence of equity investors in banks is completely ass-backwards. A quick peek at the balance sheet of their subject Wells Fargo reveals that it derives only 10.4% of its outside funding from equity investors: the vast bulk is in the form of retail and other deposits, and the balance comes from other debt and preferred investors. Show me a retail depositor who decides whether to keep her money at Wells Fargo based on the footnote disclosure in its annual report and I—after I pick my lower jaw up off the floor—will show you a hot January. Likewise, equity investors were not the funders first to the lifeboats when Bear Stearns and Lehman Brothers ran aground. Stock investors were not the parties who cratered failing banks in the financial crisis.

That is because banks and investment banks do not rely on equity investors for daily funding or liquidity. They rely on trading counterparties, repo suppliers, short-term lenders, and prime brokerage hedge fund customers to roll over constantly maturing short term debt (often funded overnight) and keep their trading balances and assets at their firm. When these institutional investors lose confidence, a bank is toast. They refuse to roll over short-term funding, they yank their assets on deposit, and they may even put on a nice, juicy short against the beleaguered bank’s stock just for good measure. And you can bet your bottom dollar they are not going to wait for the quarterly 10-Q report to be filed 45 days after period end to make their decision.

* * *

Even the much maligned (by me) Securities and Exchange Commission understands the proper relationship of public accounts to equity investors. Remember that the SEC’s objective for public reporting is not to help you fully understand a business. It is to disclose all pertinent and relevant facts and risks about a business so an investor can make her own informed decision. Banks are big, opaque, risky, and complex. What do bank financial statements tell us? They tell us banks are big, opaque, risky, and complex. That sounds pretty accurate to me. The kind of disclosure our doughty duo proposes, including ludicrously simplistic “worst-case scenarios,” would not increase investors’ understanding of the real risks inherent in the mind-bogglingly complex business of global finance. In point of fact, these are only poorly or dimly understood by the very bankers undertaking them. Instead, it would promote a sort of unwarranted confidence that would be both dangerous and misleading.

Equity investors should be terrified of banks. After all, they are the last capital providers in line in famously and ineluctably evanescent institutions, firms whose very existence can wink out over a weekend if the depositors, counterparties, and institutional investors ahead of shareholders decide to take a powder. That is the nature of banks, then, now, and always. Banks are structurally short liquidity. When liquidity dries up, or becomes prohibitively expensive, banks fail, and they fail fast. It’s as simple as that.

And yet, notwithstanding all of poor Bill Ackman’s axe grinding, retail and institutional investors still seem to want to own bank stocks.³ Why is that? Well, notwithstanding the good money to be made owning them in good times, it seems the prices of bank stocks, whether measured by historical prices, P/E ratios, or price to tangible book value, have dropped to a level where investors feel fairly compensated for the risk they are assuming. You know: the risk disclosed in the banks’ public financial statements that they are big, opaque, risky, and complex.

Nowhere is it written that bank stocks should trade at a specific multiple of book value, no matter how accurate or believable book value is. Investors may be paying lower than historical multiples of book for bank stocks because they do not trust banks to have properly marked assets to market, they may not trust management not to destroy value by making stupid errors (or errors unavoidable in today’s volatile and unpredictable markets), or they simply fear more unanticipated systemic disruptions will sink even the best-managed, most conservatively-accounted-for banks (including threatened regulatory changes). Investors are paying lower prices for bank stocks because they require higher risk-adjusted expected returns.

This does not sound like a crisis of confidence to me. This sounds like sensible, prudent investing in an uncertain world.

Related reading:
Frank Partnoy and Jesse Eisinger, What’s Inside America’s Banks? (The Atlantic, January/February 2013)
Matt Levine, Turns Out Wells Fargo Doesn’t Just Keep Your Deposits In A Stagecoach Full Of Gold Ingots (Dealbreaker, January 3, 2013)
Felix Salmon, You can’t regulate with nostalgia (Reuters, January 3, 2013)

¹ Cambridge, Massachusetts: The MIT Press, 2008, p. 18.
² For the novitiates, simply, a “commercial” (or retail) bank is primarily a lending bank: they take in retail customer deposits and lend them out in the form of mortgages, commercial loans to businesses, and other retail loans. An investment bank acts as a market intermediary, buying and selling securities and derivatives on behalf of clients and itself and advising on mergers and acquisitions. A universal bank is a combination of commercial and investment bank. Most big banks you read about nowadays, including, e.g., Wells Fargo, are universal banks. Not enough for you? Want to go deeper down the rabbit hole? Start here.
³ How do I know this? Well, the trading volume and price of public banks and investment banks is not zero, that’s how. By the way, the price to tangible book value ratio for terrible, awful, scary Wells Fargo is currently 1.7x, or almost twice book value. Perhaps that’s because equity investors take great comfort from all those information-insensitive depositors ahead of them in the capital structure.

© 2013 The Epicurean Dealmaker. All rights reserved.

108 Bells

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 01 Jan 2013 01:41:00 +0000

I have grown tired of the moon, tired of its look of astonish-
ment, the blue ice of its gaze, its arrivals and departures, of
the way it gathers lovers and loners under its invisible wings,
failing to distinguish between them. I have grown tired of
so much that used to entrance me, tired of watching cloud
shadows pass over sunlit grass, of seeing swans glide back and
forth across the lake, of peering into the dark, hoping to find
an image of a self as yet unborn. Let plainness enter the eye,
plainness like the table on which nothing is set, like a table that
is not yet even a table.

— Mark Strand, “Nocturne of the Poet Who Loved the Moon”

At midnight tonight, as they do on December 31st every year, Buddhist temples around Japan will ring out the old year with 108 chimes of the temple bell, in a ceremony called Joya no Kane. Each chime is supposed to symbolize the purification of one of 108 sins, defilements, errors, and worldly desires that stand in the way of a believer’s passage to Nirvana.

I am no Buddhist, but I am a firm believer in the psychological and, dare I say it, spiritual benefit of ritual. No matter what ritual you follow tonight, may you cleanse the errors and confusions from your past life and replace them with the clarity of a clean and hopeful future.

It is time to say goodbye to the last, tired moon of 2012. Say hello to the sunrise of a brand new year.

© 2012 The Epicurean Dealmaker. All rights reserved.

TED’s Greatest Hits of 2012

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 27 Dec 2012 18:00:00 +0000

Yes, O Dearly Beloved, it is time. That season of the year has arrived in which Your Humble and Ever-Attentive Opinioneer attempts to survey which among his meager works has earned the attention, approbation, and/or opprobrium of the masses in Anno Domini Two Thousand and Twelve. My tools, as usual, consist simply of the page view rankings of posts authored this year as they have been recorded in Google Analytics. This data is necessarily incomplete and potentially unreliable, as it misses the actual eyeballs harvested by each respective post from the far greater numbers of people who simply visited the home page of this humble opinion emporium. But hey, it’s good enough for government work.

My feelings do not enter into this ranking, as I defer, as is my wont, to my Beloved Audience’s merest whim. Three hundred and sixty-four point two five days of the year, I convey my own opinions here. Today is your day.

Listed in order of popularity, as determined by you, here are this year’s greatest hits. Enjoy.

THE CANON, 2012 Edition

1) The Rules (November) — An excessively popular semi-tongue-in-cheek list of the rules for proper behavior in corporate finance and M&A. I will let you clever readers figure out which bits are tongue-in-cheek and which are only semi. No peeking.

2) Can’t Buy Me Love (April) — In which I explain why the great unwashed should not envy the reportedly stratospheric pay of investment bankers, nor should the eager young flock to my industry in search of endless wealth. I realize that few of the latter will listen, but perhaps I will save one or two as they come barreling through the rye.

3) Goodwill Hunting (November) — A prominent financial journalist uses the incident of Hewlett Packard’s writedown of its investment in Autonomy to embarrass himself publicly with the depth and breadth of his ignorance concerning firm valuation and the rules of public accounting. I, being of sound mind and generous heart, take mild exception and attempt to convey what are quaintly known in journalism as “the facts” to any and all individuals who might actually like to know them. Illustrated with one of Your Dedicated Bloggist’s favorite Frank Cotham cartoons.

4) The Root of Some Evil (January) — A respected academic named after a Harry Potter character attempts to tie senior financial executive pay to performance and, ultimately, link excess pay to the onset of the financial crisis. After engaging in deep breathing exercises and ingesting copious quantities of legal mood stabilization substances to reduce his skyrocketing blood pressure, your Tireless Servant and Guide to All Things Financial patiently explains why said academic is full of stinky goose shit. In summary, like most academics observing my industry from the outside, this scribbler would have been far better served actually learning how my industry works, rather than trotting out tired old shibboleths from the leafy groves of lazydeme.

5) The Rape of Persephone (January) — A rather lengthy disquisition on the practice of private equity investment, spurred by the extensive media attention triggered by the Presidential candidacy of a certain ex-Bain Capital poohbah, long since forgotten. I counter various pundits’ facile misrepresentations and misunderstandings of the financial sponsor business, and roast a few canards to boot. Short summary: private equity is not Evil Personified. It’s okay; I understand your shock.

6) All’s Fair (January) — Ex-investment banker William Cohan launches a scurrilous political attack against ex-private equity boss Mitt Romney. I respond by detailing the process of buying and selling companies and the nature of the negotiations involved. As you might suspect, the M&A arena is characterized by sharp elbows and sharp practices, pragmatically employed in the service of larger goals. Just like politics. Unsurprisingly, Mr. Cohan does not come off well.

7) Three’s a Crowd (March) — Wherein I use the very public J’accuse by Goldman Sachs apostate Greg Smith and a fellow traveler to delve into the structural and cultural workings of the investment banking industry. I describe the core conflict of interest or tension at the heart of my business and explain its origin as the ineluctable outgrowth of our attempts to serve the conflicting interests of different sets of clients. I also explain how the introduction of public shareholders permanently upset this tenuous balance for the worse. Yes, you heard me correctly: it’s the shareholders’ goddamn fault.

8) A Good Offense (April) — Was the famous beaching of J.P. Morgan’s “London Whale” an example of hedging gone awry or rank speculation undone? I examine the rotting carcass from several points of view and draw a few measured conclusions. Gratuitous World War II tank destroyer analogy included gratis.

9) Chesterton’s Fence (March) — Wherein I resurrect a hoary old chestnut from professional curmudgeon and Dead White Male G.K. Chesterton to remind us that professed reformers are wise to examine the history and reasoning behind objectionable human institutions before they decide to tear them down. While this was perhaps interpreted by most readers (and intended by Mr. Chesterton) as a defense against change, the rule offers a clearly defensible roadmap to reform: if upon examination we determine an institution was established for bad reasons, or reasons which no longer apply, then we are entirely justified in removing it or replacing it with something better. When the stakes are high, tradition should not survive simply because it is tradition. Neither should change happen simply for a change. Corollary: Do not look for simple answers at this site. I do not supply them.

10) Too Much Is Never Enough (October) — And, finally, a piece in which I explain the dirty little secret of the private equity industry: that, when they have incentives to overinvest or invest poorly—say, for example, when they risk losing money, prestige, and potential future earnings if they don’t invest the excess cash currently burning a hole in their industry’s pocket—these purported paragons of fiduciary probity can be just as self-serving as any venal schmoe. This conundrum neatly illustrates two general points worth remembering: 1) economic rationality or not, almost every human endeavor is riddled with conflicts of interest, and 2)

the primary mission of any institution, once it becomes large enough, is the perpetuation and survival of the institution itself.

The private equity industry, as an aside, has become very, very large.

* * *

Well, here’s hoping 2013 will be a marked improvement over 2012, in every dimension. This year has been a total bust.

Cheerio, children.¹

¹ Sorry, no clever footnotes this year. I’m fresh out. But hey, you get what you pay for, you know.

© 2012 The Epicurean Dealmaker. All rights reserved.

Santa Baby

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 21 Dec 2012 20:45:00 +0000

Santa Cutie,
and fill my stocking with a duplex and checks;
Sign your ‘X’ on the line,
Santa Cutie,
and hurry down the chimney tonight.

Come and trim my Christmas tree
with some decorations bought at Tiffany;
I really do believe in you;
Let’s see if you believe in me...

— Eartha Kitt, “Santa Baby”

Here’s wishing Santa brings you everything you want this year.

For me, I’d just like a little more peace and joy.

Hurry down the chimney, Santa.

Happy Holidays.

© 2012 The Epicurean Dealmaker. All rights reserved.

The Rules

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 30 Nov 2012 03:21:00 +0000

Certain friends and acquaintances of mine have informed me on occasion of the existence of a website dedicated to codifying and promoting the rules of a secret society of bicyclists known as the Velominati. The Rules, as they describe them, are an interesting attempt to lay down a code of behavior for its members based upon honor, discipline, and a slightly suspect penchant for tight black riding shorts.

It occurred to me recently that a few of you among my regular readers might appreciate a similar codification of the rules of behavior for corporate finance and M&A investment bankers, minus the Spandex fetish.¹ Accordingly, here they are. Use them wisely, and with moderation.

* * *

Rule #1 — Obey The Rules.
Duh.

Rule #2 — Lead by example.
It is forbidden for someone familiar with The Rules to knowingly breach The Rules or assist another person to breach them.

Rule #3 — Guide the uninitiated.
Investment banking is an apprenticeship business. Whether your charge is McKinley C. Higginbotham IV, scion of a long line of hoary investment bankers stretching back to the founding of Dillon Read at the dawn of the Pleistocene, or Mahindra P. Parametheswamenameran, fresh off the Tuesday boat from Mumbai with an I.Q. of 215, rest assured he or she knows absolutely jack shit about what to do with a client, a deal, or even a spreadsheet. Teach them, or consign your sorry, underleveraged ass to an early “retirement.”

Rule #4 — It’s all about the money.
It is absolutely, without question, unequivocally about the money. Anyone who says otherwise is a liar, a regulator, an MBA career counselor, or Matt Taibbi.²

Rule #5 — Harden The Fuck Up.
If you forget every other rule, remember this one.

Rule #6 — Free your mind, and your career will follow.
You are not paid to think. You are not that fucking smart. You are paid to do what the client wants you to do. Go do it. The time to add real insight, to offer careful, considered judgment, is before you get hired. Then, and only then, can you tell the client what you think they should do.³ After they hire you, they own your sorry ass. Apply your overwhelming intellect to how and when to achieve their objectives, not why.

Rule #7 — Dress like a professional, not like a clown.
Wear a suit. Buy good shoes. Own more than six ties. I don’t care what your clients wear, they expect you to look the part of a slick, overeducated, hyperaggressive, insanely successful mercenary. Bulletin: the clients who wear blue jeans and sneakers expect their bankers to be dressed to the nines, too, not like themselves, because they instinctively know the difference between an entrepreneur and a professional servant. You are a servant. Dress like one. Oh, and one thing more: no two-tone shirts, banker collars, suspenders, or bowties, unless you are God, a bajillionaire, or Felix Rohatyn. Or all of the above. Nobody wants to hire a fop.

Rule #8 — Investment banking travel is for badasses. Period.
Unless you are a management consultant or a senior petroleum engineer for a global integrated oil company,⁴ you have no idea what high stakes business travel really is. It’s getting up at 4:30 in the morning to catch a flight across three time zones to meet with some asshole client who’d as soon as piss on you as take a meeting. It’s getting a call at your Milan hotel in the middle of a weeklong business trip to catch the next flight to Beijing for a two hour meeting with a bunch of government officials you’ve never even met. It’s traveling to some of the most famous and exotic destinations on the planet, only to have them all look the same: airport—>taxi—>hotel room—>taxi—>conference room—> taxi—>airport. It’s learning to become a connoisseur of hotel room service, a Jedi Master of airport Starbucks. Forget about private planes. Those are for clients and the senior executives at the top of your firm. Forget about first class. The only time you’ll get to the front of the plane is when you pay for it with your own money or the umpty billion upgrades you’ve earned by traveling to Hell and back a bajillion times this month alone. So travel like you mean it. Don’t fuck around: Rollerboards are for pussies. Checking luggage is for young families on vacation and old ladies. Neck pillows are for moral degenerates. When in doubt, see Rule #5.

Rule #9 — It never gets easier, you just make more money.
Investment banking is hard. It stays hard. The more success you have, the higher your clients’, managers’, and shareholders’ expectations rise. You’re only as good as your last trade or your last deal. Last year was last year, asshole: what have you done for me lately? Furthermore, the higher you rise in the pyramid, the closer you come to the clients, managers, and shareholders and their unrelenting, unreasonable, unjustifiable demands. Sur la Plaque, fucktards. See Rule #5.

Rule #10 — Don’t be a scumbag.
The pressure, the money, and the prestige will tempt you to cut corners. To steal credit. To stab colleagues and subordinates in the back. To gutlessly steamroll brighteyed young acolytes in the name of shareholder returns or your own personal compensation. Resist this. Don’t be a fucktard. Don’t be a gutless pussy. The life of an investment banker is nasty, brutish, and short. But if you can manage to avoid succumbing to the myriad base temptations to screw people over the profession offers you, you will earn a reputation as a... as a...

Oh, screw it. You won’t earn any reputation at all, except maybe among a few hundred of your professional colleagues. The general public won’t ever know or care about you at all.

But since when did you care what the general public thinks? Matt Taibbi sure doesn’t think you do.

¹ There are only two rules for my colleagues on the other side of the house, in Sales and Trading: 1) Don’t get caught; and 2) Don’t eat more than two onion cheeseburgers before 8:30 am every morning.
² Regardless of what Matt Taibbi says, of course, it’s not all about the money. But let’s level set, shall we? Matt Taibbi’s not as stupid as he sounds.
³ If you have the balls. And senior management’s support.
⁴ And if you are, why the fuck do you travel like me while getting paid a fraction of what I do? You’re smarter than that.

© 2012 The Epicurean Dealmaker. All rights reserved.

Thanksgiving Day

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 22 Nov 2012 15:18:00 +0000

When in disgrace with fortune and men’s eyes
I all alone beweep my outcast state,
And trouble deaf heaven with my bootless cries,
And look upon myself, and curse my fate,
Wishing me like to one more rich in hope,
Featur’d like him, like him with friends possess’d,
Desiring this man’s art, and that man’s scope,
With what I most enjoy contented least;
Yet in these thoughts my self almost despising,
Haply I think on thee,—and then my state,
Like to the lark at break of day arising
From sullen earth, sings hymns at heaven’s gate;

For thy sweet love remember’d such wealth brings
That then I scorn to change my state with kings.

— William Shakespeare, Sonnet 29

Lay aside your discontent, your envy, and your unhappiness today. Think not on your wealth, your possessions, your station in life, or the lack thereof. Think instead on the love which makes your brief journey here worthwhile: family, friends, life itself.

And smile.

Happy Thanksgiving.

© 2012 The Epicurean Dealmaker. All rights reserved.

Goodwill Hunting

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 21 Nov 2012 05:52:00 +0000

I try to maintain my equanimity, O Dearly Beloved. I really do.

I make every effort to exercise regularly, eat healthy food, and maintain my legendary composure by adhering to a strict drug and alcohol regimen sketched out on a bar napkin in 1962 by Hunter S. Thompson himself. But every so often, some ill-advised knucklehead will publish, under the aegis of a purportedly respected publication, such toxic, ridiculous, and misleading nonsense that I simply must respond with decisive and overwhelming force.

Today’s example hails from the eponymous financial newssite of Gotham City’s favorite sesquibillionaire mayor and short-man-about-town, Mike Bloomberg. In it, the award-winning [sic] financial journalist Jonathan Weil ventures the following thesis for the entertainment and edification of his hapless readers:

Here’s the problem with Hewlett-Packard Co.’s explanation today for why it took an $8.8 billion writedown related to its purchase of Autonomy Corp.: The numbers don’t make sense.

He then spends the next nine paragraphs making sure the numbers don’t make any sense and befuddling the naive and inexperienced among his audience into a state of utter confusion matched only by his own apparent cluelessness. Chief among his complaints seems to be that he doesn’t understand how HP can write down over $5 billion of value due to allegedly dodgy accounting associated with Autonomy when the latter had pre-acquisition assets totalling only $3.5 billion. He also seems very suspicious of the $6.6 (later $6.9) billion of goodwill Hewlett-Packard recorded when it purchased Autonomy, writing that

HP recorded the goodwill because it knew Autonomy’s identifiable assets were worth much less than it paid.

The implication being, of course, that HP actually knew it was “overpaying” for Autonomy at the time and that the current writedown is really just HP acknowledging the inevitable.

Call me crazy, but I have to believe there are some among you who might agree with me that it seems reasonable a journalist tasked with covering financial markets, stocks, and corporate finance should have at least some basic understanding of public accounting rules and merger math. Or at least the time, resources, and ambition to find out. Apparently we would be wrong.

So, in the interest of trying to rescue some of the well-meaning ignoramuses who have been happily educated into insensibility by Mr. Weil’s folly, I will try to provide a mini-primer on purchase accounting. In the course of this, I believe I can demonstrate that, indeed, Hewlett-Packard’s recent accounting writedowns make perfect sense.

* * *

Chief among the conceptual foundations of merger math which we must address is the distinction between enterprise value and book value, or true value and accounting. Most mergers and acquisitions are done to acquire operating businesses, not merely a laundry list of assets. Just like the real value of Apple Computer cannot be reduced to its Cupertino real estate, the inventory in its factories and stores, and the office supplies in its employees’ desks, the real value of an operating business lies in the way its management and employees use those assets, their knowledge, and their company’s brand and reputation to earn income. That is what a business acquirer will pay for.

How much an acquirer will pay for a business is determined in the course of merger negotiations by reference to comparable companies trading in the public markets, comparable M&A transactions, and the projected discounted future cash flows of the target business, overlaid by the competitive dynamic of the sale process. At the end of the day, the acquirer pays what it decides owning the target business and its associated cash flows would be worth to it, moderated by what it has to and can afford to pay. The book value of assets on the target company’s balance sheet has nothing to do with it.

Once the ink has dried on the purchase agreement and the checks have cleared, however, the accountants move in to memorialize (or embalm) the transaction in their own special way. They review the balance sheet assets and liabilities of the target company to determine their fair market value at the time, which more often than not is different from their recorded book values.¹ Tangible assets like receivables, inventory, real estate, fixtures, and office supplies are valued at replacement cost or nearest appropriate market value and recorded in the opening balance sheet. Then the gnomes attempt to quantify the value of discrete and identifiable intangible assets like patents, customer lists, brands, and other intellectual property: all the assets you cannot put your finger on but you know are essential to generating the ongoing revenues and cash flows of the business. Add these together, and you have all the tangible and intangible assets which can show up on a balance sheet. Subtract that total (less the fair value of operating liabilities like accounts payable) from the amount of money you paid for the business and, presto, you get goodwill: the accountants’ remainder account where they memorialize the premium to the target’s net tangible and intangible assets the acquirer paid for the business. Goodwill can be seen as the difference between the full operating value of a business—as paid at one point in time by a third party buyer in a specific arms length transaction—and the fair value of the net operating assets its managers and employees use to run it.

So when Hewlett-Packard decided to write down the value of its investment in Autonomy, it did not inventory paper clips. It revalued the remaining intangible assets on its balance sheet acquired from Autonomy, based on their newly-determined earning power, and it revalued the goodwill of the total business based on its revised understanding of its overall cash generating capability. If Autonomy did indeed misrepresent the earning power of its business as HP alleges, goodwill would be the exact account where you would expect to see writedowns.

Autonomy misrepresented its gross profit margin and also falsely created or miscategorized more than $200 million in revenue over a two-year period starting in 2009, John Schultz, Hewlett-Packard’s general counsel, said in an interview. Autonomy was reselling Dell Inc. computers and counting those sales as software revenue, he said. Some sales were also fabricated through resellers.

When your view of the value of a business or collection of assets changes, accounting rules compel you to revise any associated goodwill account to reflect this new information. This is not that difficult a concept to grasp or convey.²

I just wish our financial press corps was better at educating the public about such things, rather than muddying the water because they’re too lazy to figure it out beforehand.

* * *

UPDATE November 21, 2012: Ugh. Apparently Jonathan Weil has not heard of the Law of Holes:

When you find yourself in a hole with a shovel in your hand, stop digging.

He has released another post today in which he throws about random balance sheet, income statement, and market value numbers from Hewlett-Packard’s accounts without the least apparent understanding of what any of them mean or their most basic interrelationships. He is trying to make the argument that HP massively overpaid for Autonomy in the first place, and that the admittedly skimpy numbers which the former has released in connection with its writedown announcement do not seem to disprove his thesis. He may be right, for all I know. I do not know and I do not care.

But when he spews forth idiotic, misleading dreck like this, my ears begin to smoke:

HP finished the fiscal third quarter with $32 billion of shareholder equity. Its balance sheet showed $36.8 billion of goodwill (which isn’t a saleable asset) and $8 billion of other intangible assets. By comparison, HP finished the fiscal fourth quarter on Oct. 31 with a stock-market value of $27.2 billion.

In other words, on paper, HP’s goodwill supposedly was worth more than the company as a whole [emphasis mine]. The market knew big writedowns were necessary. Investors saw that Autonomy was a disaster. They were just quicker to acknowledge the reality than HP was.

No, no, no, no, NO. No, you numbnuts. Goodwill is a balance sheet account, based on historic book value with periodic testing to check that it is still valid. It bears no direct relation to what the company is worth at all.

And the worth of the company is not equal to the market value of its common equity, except in the most trivial of cases. The company’s worth, or value—known among people who actually work with this concept for a living, like me and, oh, a billion other non-idiots as total enterprise value—consists of the market value of common equity plus the market (or book) value of debt and other capital liabilities less cash on hand. In HP’s case, at the end of its 2012 fiscal third quarter, this was $27.2 billion + $29.7 billion – $9.5 billion, or $47.4 billion. At July 31, 2012, Hewlett-Packard as a whole was worth $47.4 billion. This, just to help Mr. Weil in case he runs out of fingers, is clearly more than $36.8 billion in goodwill. Which, by the way, doesn’t mean anything, just in case you were wondering.

You might argue that with my carping I am overreacting to Mr. Weil’s sloppy writing and thinking and missing his larger, potentially valid point about the poor rationale for HP’s purchase of Autonomy. But I am traditional enough to believe that a person who puts himself out there as a financial journalist who writes about M&A and corporate accounting issues for an international financial publication should fucking know a little about goddamn basic accounting.

Go ahead, call me cranky and unreasonable. I’ve been called worse by worse people.

And someone, please, buy Jonathan Weil a basic accounting textbook and make him read it before he writes again. My blood pressure will thank you.

¹ Goodwill already on the target company’s balance sheet from prior acquisitions of its own, like the $1.5 billion in Autonomy’s pre-deal accounts, is written off at once. Of the remaining $1.9 billion of Autonomy’s pre-deal assets, over $700 million was cash and $600 million was other intangibles. Hewlett-Packard acquired very few tangible operating assets of any kind when it bought Autonomy.
² I don’t have an opinion, by the way, as to whether HP’s allegation of accounting shenanigans is true or not. Autonomy’s former management disputes it. All I will say is valuation of intangible assets either in a sale transaction or on an interim basis and valuation of the long-term earnings power of a business where there is no concrete, objective reference point like a deal value to point to can be awfully squishy, subjective stuff. This, naturally, raises the question as to whether HP might be sandbagging its goodwill writedown to make future results look better. I have no special insight here, other than to note such an occurrence has happened many times before.

© 2012 The Epicurean Dealmaker. All rights reserved.

Get Up Offa That Thing

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 05 Nov 2012 23:49:00 +0000

To VOTE tomorrow.

Why?

It is rational.

Not only is it rational, under certain circumstances it can be morally virtuous.

And, notwithstanding the preceding perspectives, it is a civic duty¹ which is entirely reasonable and rational for the democratic society to which you putatively belong to expect you to perform. It is a voluntary, non-monetary tax, if you will, a donation of your time and inconvenience toward the common good from which you and the rest of your fellow citizens daily benefit.

Finally, regardless of your political or ideological affiliation, you must appreciate that the more people like you vote, the less likely our polity will be hijacked by the whackos, the unhinged, and the mentally and morally bankrupt members of the opposition.

Unless, of course, you are a member of said whackos, unhinged, etc. In which case I suggest you vote Thursday.

Happy Citizenship Day!

¹ I am well aware, O Dearest and Most Indulgent of Readers, that duty is an unpopular word (and concept) in our current culture and society. I remain unapologetic in its use, and consider its unpopularity to be a stain upon the society which undervalues it, rather than a valid critique of the concept itself. Call me anachronistic if you will. I’ve been called worse.

© 2012 The Epicurean Dealmaker. All rights reserved.

To a Dying Dog

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 27 Oct 2012 15:04:00 +0000

Es la hora de partir, la dura y fría hora
que la noche sujeta a todo horario.

El cinturón ruidoso del mar ciñe la costa.
Surgen frías estrellas, emigran negros pájaros.

Abandonado como los muelles en el alba.
Sólo la sombra trémula se retuerce en mis manos.

Ah más allá de todo. Ah más allá de todo.

Es la hora de partir. Oh abandonado!

— Pablo Neruda, “La Canción Desesperada”

* * *

What do you seek, little one?

What are you looking for, when you walk into a corner and stand, unseeing, with your nose pointed to the wall? What drives you to squeeze behind tables and chairs, to hide under sofas and beds where nothing and no-one can disturb your privacy but the slow drifting down of dust?

What makes you stop and stare across the street, at nothing at all? What makes you turn and walk slowly toward that emptiness, as if to some summons only you can hear?

I know it is nothing you see, or smell, or hear. You are like a plant, turning blindly toward the heat of a sun you feel but cannot see. The call is patient, beckoning.

What goes through your head at these moments? You must be waiting; waiting for the moment when that invisible door finally cracks open, flooding you with light and beckoning you to your long home. You must pass through that door alone, as we all must.

I will miss you when you go.

I cannot follow you now, Old Friend, not now. But I hope to see you again soon.

© 2012 The Epicurean Dealmaker. All rights reserved.

No Country for Young Children

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 22 Oct 2012 01:31:00 +0000

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you ran very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place.

If you want to get somewhere else, you must run at least twice as fast as that!”

— Lewis Carroll, Through the Looking Glass

I admire Gillian Tett, I really do. She is a fine, perceptive, and aggressive financial reporter and writer who has contributed a great deal to our understanding of the origins of the recent financial crisis, as well as many other things.

But apparently she needs to stick to her knitting, because this recent piece on the influence of legacy on college admissions in the United States is rubbish.

Reading between the lines, Ms Tett recently returned from a clutch of cocktail parties and dinners with American friends whose children were admitted to elite U.S. universities this Fall. From her remarks she seems to have heard the sort of alternately smug, self-serving, paranoid, and neurotic bullshit and misinformation that I have been subjected to for the past several years as the parent of a high schooler recently off to college and one in the chute. In my experience, middle and upper class parents with children of college-bound age in Manhattan and other socioeconomic pressure cookers are the worst sort of frantic, hypercompetitive cynics you can encounter, and they will grasp at the flimsiest and most ridiculous of straws to support their desperate hope little Susy or Billy will get into a top university.

Hence you get nonsense—unsupported in Ms Tett’s piece by any citation or reference (and no doubt made up by some bug-eyed X-ray socialite over Cosmopolitans in a Park Avenue co-op)— that “educational researchers estimate that... having a family link [to the school she is applying to] increases a mid-level student’s chance of entry by about 60 per cent.” Since when? Says who? And how the fuck did they figure out that differential admission statistic? Did they sneak into the Harvard Admissions Office after hours and steal the ULTRA-TOP-SECRET-ON-PAIN-OF-DEATH-NEVER-SHOW-TO-PARENTS-REAL-ADMISSION-CRITERIA folder?

It is just that sort of made-up, silly statistic or “secret” to guaranteeing Bif or Muffy a spot at Yale that I have had thrown at me for the last several years by people convinced of its veracity. The same sort of secret that charlatans use to dupe desperate parents into paying tens of thousands of dollars for “college admissions consulting” services. Let me give you the real scoop: all those secrets are bullshit. How do I know? Easy: nobody has the data to figure it out.

* * *

Annnyhoo. Enough of my ranting.

Of the Holy Trinity of Higher Education in North America—Harvard, Yale, and Princeton, known succinctly as HYP—only Yale is indiscreet enough to make the percentage of its enrolled freshmen from the Class of 2016 who are legacies easy to find: 13%. This aligns neatly with the 15% estimate from the unidentified “educational researchers” Ms Tett cites. One would be surprised if Harvard, Princeton, and other pretenders to the triple throne like Stanford were much different.

But let’s examine just how damning this statistic really is. One measure is that Yale also reveals that 12.1% of its current freshman class are first-generation college students; that is, students who are the first members of their family ever to attend a four-year college or university. You can’t find an antidote to the perpetuation of entrenched elite privilege more effective than this: the sons and daughters of high school graduates (or worse) comprise almost as large a percentage of the anointed New Haven elite as do the scions of Elis past. There’s nothing like an uneducated janitor’s daughter with perfect SAT scores and a 4.0 GPA to rattle the security and worldview of Winthrop P. Witherspoon IV.

A second reassurance can be drawn from the academic records of the students these institutions admit. Ninety-five percent of Yale’s enrolled freshmen were ranked in the top 10% of their high school class; 96% of Princeton’s were. If the Ivy League is admitting the idiot sons and daughters of alumni in preference to striving young geniuses from the wrong side of the tracks, they sure are some smart idiots. Similar conclusions can be drawn from the admission statistics based on board scores and GPAs. In comparison to its overall admit rate of 7.9% last year (2,094 admits out of 26,664 applicants), for example, Princeton offered a spot in its pantheon of privilege to only 10.4% of students who applied with a perfect grade point average and 18.7% of applicants with SAT scores 2300 and higher (out of 2400). On an overall basis, Harvard and Yale were even stingier with their golden tickets: only 5.9% and 6.8%, respectively. Let’s face it: no matter what your qualifications are, your chance of getting into one of these three schools is vanishingly small.

* * *

Ultimately, you must understand that the most elite institutions of higher learning in this country are looking to build and cultivate student bodies that are vibrant and diverse in almost every dimension: background, ethnicity, geography, interests, and extracurricular talents. They do this because they want to—diversity attracts the best students and polishes their institutional reputation—and because they can. Students from all over the world submit almost 90,000 applications for admission to less than 4,400 slots at HYP alone. In this dynamic, superb intellectual and academic ability is simply table stakes. If you don’t have it, you probably won’t even make it past the first round.

Yale makes this very clear on its admission site:

We estimate that over three quarters of the students who apply for admission to Yale are qualified to do the work here. Between two and three hundred students in any year are so strong academically that their admission is scarcely ever in doubt. But here is the thing to know: the great majority of students who are admitted stand out from the rest because a lot of little things, when added up, tip the scale in their favor. So what matters most in your application? Ultimately, everything matters.

Including whether you are a legacy. Perhaps, if you are competing against an otherwise indistinguishable applicant, one with intellectual abilities, ethnicity, and extracurricular interests identical to your own, being a legacy will tip the scale in your favor. But, more often than not, you will likely be competing for a slot with someone who has another set of qualities seductive to the university. Princeton discloses the admissions criteria it uses to the federal government: “Very important” = academic capability, talent, and character; “important” = extracurriculars; “considered” = legacy, first generation student, geography, race/ethnicity, volunteerism, and work experience. Being the child of an alumnus or alumna is in no way a lock.

It is also worth noting that the children of privilege, the elites we are so worried about perpetuating via access to our most hallowed educational institutions, often come from the least “diverse” and hence least attractive racial and ethnic groups to these leading universities. Ceteris paribus, how much does ticking the legacy box weigh against the diversity agenda?

* * *

I have witnessed up close and personal the rank cynicism which Ms Tett has imbibed from her friends. A substantial number of the Manhattan parents I socialize with repeat with absolute conviction the belief that a huge donation is the price of guaranteed admission for their child to an Ivy League school. Stories circulate on the Upper East Side whisper circuit of a $5 million check to one school, a $10 million one to another. Unspoken is whether the children in question were talented and interesting enough to get in on their own merits. For some reason, this seems to be considered beside the point, which is immensely sad in its own right.¹

In some respects, the leading universities’ refusal to be more transparent about their admissions process perpetuates this belief. A cynic might say they prefer it this way. After all, a parent desirous of sending Junior to Harvard cannot change her status as an alumna, but she certainly can change the frequency and amount of money she donates to her alma mater. The trick is there is no explicit quid pro quo. I know several alumni who donated generously to their university only to see their children rejected.

But frankly, the connection between legacy admissions and donations is spurious. Very few alumni can write the sort of check that would retrieve their son or daughter from the reject pile at HYP. Most alumni simply don’t have that much money. Many of them are successful, true, but not all of them are, and very few qualify as truly rich. And the truly rich can write a check to Harvard, Princeton, or Yale for their kid whether they went there or not.

The real issue which Ms Tett does not address—the real way elites perpetuate themselves—is they do whatever they have to to make sure their children are prepared to compete head to head with other children on the primary criteria for college admission. They send their kids to expensive private schools, they hire tutors to buff their performance in school and on standardized tests, and they work their extensive social networks to get internships, enriching extracurricular experiences, and letters of recommendation to bolster their resumés, transcripts, and college applications. This is the true advantage educated elites have in the college admissions game: it’s not so much that they game the system—the system is less gameable than people think—but they spend whatever it takes to win according to the existing rules.

Is this fair? I don’t know. But I will say this: it is far more likely that the children of the elite compete more with each other than they do with applicants from other diversity buckets (ethnic, geographic, extracurricular). In this way, the developmental arms race among elite parents ends up looking more like a sociological version of the Red Queen Effect than it does unfair competition against the weak and underprivileged.

Harvard, Princeton, and Yale can take care of the latter. Nobody helps the elite but ourselves.²

“Do you mean, sir, that these birds are cannibals?”

“That’s an odd question, young Master,” the banker said. “I merely said the birds drink blood. It doesn’t have to be the blood of their own kind, does it?”

“It was not an odd question,” Paul said, and Jessica noted the brittle riposte quality of her training exposed in his voice. “Most educated people know that the worst potential competition for any young organism can come from its own kind.” He deliberately forked a bite of food from his companion’s plate, ate it. “They are eating from the same bowl. They have the same basic requirements.”

— Frank Herbert, Dune

Related reading:
Gillian Tett, The price of admission (Financial Times, October 19, 2012)
The Red Queen Effect (Farnam Street, October 14, 2012)
Et in Arcadia Ego (November 11, 2008)

¹ Not frequently enough discussed in this whole topic is the emotional and psychological cost to our children of such shenanigans. First, the debilitating suspicion that, without Mommy and Daddy’s money, influence, and machinations, the child herself could not accomplish what her parents so desperately expect of her. Second, the loss of childhood freedom, lack of care, and play to relentless careerism and resumé polishing. In my position as a father of teenagers and an interviewer of recent college graduates, I see far too many astonishingly accomplished young people who never seem to have had a childhood.
² This is not a complaint. Simply an observation.

© 2012 The Epicurean Dealmaker. All rights reserved.

The Epicurean Dealmaker

Mr. Indispensable

Go Ahead, Live a Little

Nothing Gold Can Stay

In Praise of Jargon

What Infinite Ocean

Weekend Interlude

How Can We Know the Dancer from the Dance?

Curriculum Vitae

She’s Trading Her MG for a White Chrysler LeBaron

Of Unexpected Death

Table of Contents

Skin in Which Game?

What’s Next?

Where Angels Fear to Tread

Wherein Your Droll, Semi-Victorian Bloggist Jumps the Shark

A Photograph, Not a Circuit Diagram

108 Bells

TED’s Greatest Hits of 2012

Santa Baby

The Rules

Thanksgiving Day

Goodwill Hunting

Get Up Offa That Thing

To a Dying Dog

No Country for Young Children